According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply.
A) increase
B) decrease
C) first increase and then decrease
D) first decrease and then increase

Question

Quizplus · Accepted Answer

In the IS-LM model, an increase in taxes would shift the IS curve to the left, reducing income and output. To counteract this and hold income constant, the Fed would need to increase the money supply, which would shift the LM curve to the right, offsetting the leftward shift of the IS curve and stabilizing income.

According to the IS-LM Model, If Congress Raises Taxes but the Fed