An increase in the effective tax rate on capital would cause the IS curve to ________ and the LM curve to ________.
A)shift down and to the left; be unchanged
B)shift down and to the left; shift up and to the left
C)shift up and to the right; be unchanged
D)shift up and to the right; shift up and to the left

Question

Quizplus · Accepted Answer

An increase in the effective tax rate on capital would discourage investment, leading to a decrease in aggregate demand. This would cause the IS curve, which represents equilibrium in the goods market, to shift down and to the left. The LM curve, which represents equilibrium in the money market, would remain unchanged because it is not directly affected by changes in the tax rate on capital.

An Increase in the Effective Tax Rate on Capital Would