Suppose individuals now believe that there will be a future tax increase.This increase in expected future taxes will cause which of the following to occur in the current period?

Question

Quizplus · Accepted Answer

If individuals believe that there will be a future tax increase, they will expect to have less disposable income in the future. Therefore, they are likely to reduce their consumption and investment spending in the current period, causing a leftward shift in the IS curve. This is because a decrease in consumption and investment spending will lead to a decrease in output and hence a decrease in the demand for money. Consequently, the LM curve will shift down.

Suppose Individuals Now Believe That There Will Be a Future