ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Taxes influence the allocation to the extent that the interest returns are taxable and the costs are not deductible. ‘However, consumption and, hence, money demand will be increased to the extent that lower business taxes lead to a rise in dividends and/or are shifted into higher wages or lower prices.

Detailed explanation-2: -The Fed can increase the money supply by lowering the reserve requirements for banks, which allows them to lend more money. Conversely, by raising the banks’ reserve requirements, the Fed can decrease the size of the money supply.

Detailed explanation-3: -If income rises as a straight line, the quantity of money will increase at a decreasing rate, then reach a maximum, and decline thereafter.

Detailed explanation-4: -The decrease in the money supply reduces income and raises the interest rate. Consumption falls because disposable income falls, whereas investment falls because the interest rate rises.