An increase in taxes shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:
A) downward and to the left.
B) upward and to the right.
C) upward and to the left.
D) downward and to the right.

Question

Quizplus · Accepted Answer

An increase in taxes reduces disposable income, leading to a decrease in consumption. This decrease in consumption reduces aggregate demand, shifting the IS curve to the left. The curve also shifts downward because, at every level of income, a higher interest rate is now required to equate saving and investment due to the decrease in consumption.

An Increase in Taxes Shifts the IS Curve, Drawn with Income