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    IS-LM model

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    Assume that the economy is at full employment and the government decides to cut taxes to give the economy an extra boost.

    PLEASE DO NOT SUBMIT A RESPONSE UNLESS YOU TRULY UNDERSTAND THE IS-LM MODEL.

    a. Show the short run effect of this tax cut using the IS-LM model (MUST draw the chart and show the IS and LM curves and MUST explain how you came to your conclusion).

    b. What will happen to output and the interest rate and why?

    c. What will happen in the long run?

    d. If the Federal Reserve is following a policy of price stability, how should they react to the tax increase? If the Fed action is implemented, will the tax cut succeed in boosting output?

    © BrainMass Inc. brainmass.com October 9, 2019, 5:51 pm ad1c9bdddf
    https://brainmass.com/economics/employment/curve-reaction-fiscal-policy-69903

    Solution Summary

    The solution applies the IS-LM model curve and reaction to fiscal policy.

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