Spend it on goods and services

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Reference no: EM13974682

In explaining the 2003 bill to cut taxes, President Bush is quoted as saying, “When people have more money, they can spend it on goods and services.”

a. In the IS–LM model, will a tax cut change the money supply in the economy? Does a change in the money supply shift the IS or the LM curve?

b. In the IS–LM model, does a tax cut shift the IS or the LM curve? Demonstrate this using a graph.

c. Based on your answers in a and b, how can you reconcile the president's statement with economics? Can you suggest how his statement could be modified to be consistent with the IS–LM model?

Reference no: EM13974682

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