The permanent income model implies that
A)a permanent tax cut has a larger effect on consumption than does a temporary tax cut.
B)a permanent tax cut has a smaller effect on consumption than does a temporary tax cut.
C)tax cuts should not be used because consumers are not rational.
D)both permanent and temporary tax cuts are effective in changing consumption.
E)both permanent and temporary tax cuts have no effects on consumption.

Question

Quizplus · Accepted Answer

The permanent income model suggests that consumers base their consumption decisions on their long-term or permanent income, rather than their current income. Therefore, a permanent tax cut would lead to a more significant increase in disposable income and, thus, higher consumption compared to a temporary tax cut.

The Permanent Income Model Implies That