Question 1. Explain why the aggregate demand curve slopes downward?
Answer: The summary of the IS-LM model is depicted by AD curve. AD curve slopes downward because at a lower level of price, the real money balance increases, and interest rate falls, which stimulates the investments. As a result the equilibrium income increases.
Question 2. What is the impact of an increase in taxes on the interest rate, income, consumption, and investment?
Answer: When the tax increases, it will cause the IS curve to shift towards left reaching to IS2 from IS1. As a result of this, the equilibrium point A shifts to B where the interest rate will reach to r2 by falling from r1. The income will also be reduced from Y1 to Y2. The increase in the tax ...