Suppose fiscal policy makers pass a budget that cuts taxes in the ...

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Suppose fiscal policy makers pass a budget that cuts taxes in the current period and are expected to cut taxes in the future. Use the IS-LM model to illustrate graphically and explain the effects of this policy on current output and the current interest rate.
 
  What will be an ideal response?

Question 2

When the unemployment rate is low, we would expect that
 
  A) the probability of losing a job is high.
  B) the probability of losing a job is low.
  C) the probability an unemployed individual will find another job is low.
  D) the separation rate will increase.

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Answer to Question 1

The cut in current T will cause disposable income to rise and current C to rise. This will cause the IS curve to shift right. The reduction in future expected taxes will, all else fixed, increase human wealth and current consumption. This will also cause the IS curve to shift right. As future T is cut, future Y will rise. This will increase both current C and I and, again, IS shifts to the right. The increase in future interest rates will have the opposite effect on C and I causing the IS curve to shift left. In theory, the effects on current output are ambiguous. The higher expected future interest rates have a negative effect on current demand. All other factors have the opposite effect.

Answer to Question 2

B