The tax decrease makes the interest rate ______ and investment ______ in this model.

Question

BlackTom AI · Accepted Answer

We start by identifying the effect described: a tax decrease. In many macroeconomic models, a tax cut increases leisure or after-tax income, shifting the IS curve and affecting the interest rate and investment.
Option 1: 'fall, rise' would imply that lower taxes reduce the interest rate and boost investment. This misreads the typical interaction: a higher interest rate generally accompanies a tax-driven expansion that raises demand, which tends to push rates up rather than down, and higher rates usually dampen investment rather than spur it.
Option 2: 'rise, fall' corresponds to the conventional outcome in the related model: a tax cut can raise overall demand, pushing up the equilibrium interest rate. Since investment is inversely related to the interest rate in most frameworks, a higher rate tends to reduce investment. This pairing matches the standard crowding-out mechanism where higher rates discourage additional investment.
Option 3: 'fall, not change' would mean both the rate falls and investment stays the same. A tax decrease typically stimulates the economy and changes the financing conditions, making a fall in the interest rate unlikely and investment changes more plausibly.
Option 4: 'rise, rise' would imply that both interest rate and investment rise. While higher rates could impede investment, some models allow investment to rise if the tax cut directly boosts investment incentives or expected returns sufficiently. However, in the conventional IS-LM-like framing, the dominant effect of a tax decrease is to raise rates and crowd out some investment, not to raise both.
In summary, among the options, 'rise, fall' best captures the standard outcome where the tax decrease elevates the interest rate, and the higher rate reduces investment. The other choices either contradict known relationships between rates and investment or rely on less typical dynamics.

ECN 101 B01-B04 FQ 2025 Homework 1 due October 10

The tax decrease makes the interest rate and investment in this model.

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ECN 101 B01-B04 FQ 2025 Homework 1 due October 10

The tax decrease makes the interest rate ______ and investment ______ in this model.

View Explanation

Log in for full answers

Similar Questions

If, in addition, 𝑅 𝑡 = 𝑟 ¯ , short run output [ Select ] .

The IS curve shifts when any of the following economic variables change except:

When the LM curve is drawn, the quantity that is held fixed is:

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will __, shifting the ____ curve to the right and returning output to the natural level.

In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.

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.

An increase in the money supply shifts the __ curve to the right, and the aggregate demand curve ____.

Other things equal, a given change in money supply has a larger effect on demand the:

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

The tax decrease makes the interest rate and investment in this model.

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will , shifting the __ curve to the right and returning output to the natural level.

In the IS-LM model, a decrease in government purchases leads to a(n) in planned expenditures, a(n) in total income, a(n) in money demand, and a(n) in the equilibrium interest rate.

An increase in the money supply shifts the curve to the right, and the aggregate demand curve __.