President Bush is quoted as saying, "When people have more money, they can spend it on goods and services" in explaining the 2003 bill to cut taxes.
1. Does a change in the money supply shift the IS or the LM curve? In the IS-LM model, will a tax cut change the money supply in the economy?
2. Demonstrate this using a graph. In the IS-LM model, does a tax cut shift the IS or the LM curve?
3. Based on your answers in a and b, how can you reconcile the president's statement with economics? Can you suggest how his statement could be modified to be consistent with the IS-LM model?