Consider a consumption function of C = 0.75 (Y – T). a) If government spending increases by $300 and there is a tax hike of $500 to fund this increase, according to the IS-LM model will the IS curve shift up or down and by how much? b) Considering your shift in the IS curve from part a, how should the Federal Reserve adjust the money supply if they want to keep interest rates constant?
Consider a consumption function of C = 0.75 (Y – T). a) If government spending increases by $300 and there is a tax hike of $500 to fund this increase, according to the IS-LM model will the IS curve shift up or down and by how much? b) Considering your shift in the IS curve from part a, how should the Federal Reserve adjust the money supply if they want to keep interest rates constant?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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conomics
Consider a consumption function of C = 0.75 (Y – T).
a) If government spending increases by $300 and there is a tax hike of $500 to fund this
increase, according to the IS-LM model will the IS curve shift up or down and by
how much?
b) Considering your shift in the IS curve from part a, how should the Federal Reserve
adjust the money supply if they want to keep interest rates constant?
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