11. IS/LM: Effects of a tax increase

Interacting with graphs to learn more about the effects of a tax increase

Taxes are a powerful tool of fiscal policy. Government officials can levy taxes for many reasons: to raise revenue to pay for government services, to alter behavior such as smoking, alcohol, and driving, as well as others. Government officials can also use the tax rate as a tool to alter the macroeconomic variables such as output, the price level, and the interest rate. Let's look at the IS and LM curves to see how an increase in tax rates affects output and interest rates.

Objectives

Click on the 'Exploration' link above to continue.