According to the Keynesian IS–LM model, what is the effect of each of the following on output, the real interest rate, employment, and the price level? Distinguish between the short run and the long run. a. Increased tax incentives for investment (the tax breaks for investment are offset by lump-sum tax increases that keep total current tax collections unchanged). b. Increased tax incentives for saving [as in Part (a), lump-sum tax increases offset the effect on total current tax collections]. c. A wave of investor pessimism about the future profitability of capital investments. d. An increase in consumer confidence, as consumers expect that their incomes will be higher in the future.
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