A decrease in taxes on interest income would increase the interest rate a true b False

The increase in income from the higher investment demand also raises interest rates. This happens because the higher income raises demand for money; since the supply of money does not change, the interest rate must rise in order to restore equilibrium in the money market.

Any change (decrease in government consumption, increase in taxes, decrease in consumer confidence - proxied by c0) that, for a given interest rate, decreases the demand for goods creates a shift of the IS curve to the left.

Generally a decrease in real interest rates stimulates personal consumption, which is what Professor Krugman has pointed out. When the real interest rate goes down, in other words, the magnitude of the substitution effect, which stimulates consumption, outweighs that of the income effect, which reduces interest income.

When taxes are given as a percentage of income, a higher tax rate implies a higher government spending multiplier. FALSE - higher income taxes will lead to a lower multiplier. 9.In an open economy, the government spending multiplier will be lower than in an economy without international trade.