Suppose policy makers decide to reduce taxes.This fiscal policy action will cause which of the following to occur?

Question

Quizplus · Accepted Answer

Tax reduction will increase consumer disposable income, which will cause an increase in consumption expenditure and in turn aggregate demand. As a result, the IS curve shifts to the right. Additionally, the increase in consumption expenditure will cause an increase in money demand, which in turn will shift the LM curve to the right. Therefore, the correct answer is that the IS curve shifts and the economy moves along the LM curve.

Suppose Policy Makers Decide to Reduce Taxes