In an IS-LM model, if the government enacts restrictive fiscal policy through a tax increaseor a cut in government purchases
a. The interest rate will decline, lowering the incentive to save and thus also the level of investment spending
b. The level of income will decrease but the interest rate will increase
c. Both income and the interest rate will decrease
d. The LM-curve will shift to the left
e. The IS-curve will shift to the left, followed by a shift of the LM-curve to the left since this policy will change interest rates and therefore money demand
Answer: c. Both income and the interest rate will decrease
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