Which of the following will occur in an IS-LM model, if the government decides to raise the income tax rate?

Question

Quizplus · Accepted Answer

When the government raises the income tax rate, it reduces disposable income and decreases consumer spending. This causes a decrease in aggregate demand and a leftward shift of the IS-curve. Additionally, the increase in tax revenue may lead to an increase in government spending, leading to an increase in interest rates and a leftward shift of the LM-curve. Therefore, the IS-curve becomes steeper and shifts to the left.

Which of the Following Will Occur in an IS-LM Model