The Specification of the Demand for Money and the Tax Multiplier

Abstract

This paper modifies the standard IS-LM curve model by making the demand for money a function of taxes as well as of national income and the rate of interest. It finds that as a result, the tax multiplier may be positive and a progressive income tax may be less of a built-in stabilizer than a proportional income tax. These curious analytical results have as yet unknown empirical content, but cannot be rejected a priori.