If consumers expect a tax cut to be temporary,
A) consumption remains unchanged.
B) the increase in consumption will be much larger than for a permanent tax cut.
C) the decrease in consumption will be much smaller than for a permanent tax cut.
D) the overall effects are much larger than for a permanent tax cut.
E) the increase in consumption will be much smaller than for a permanent tax cut.

Question

Quizplus · Accepted Answer

If consumers expect a tax cut to be temporary, they are less likely to increase their consumption by a significant amount as they may save some of the money they receive from the tax cut, assuming that the tax cut may not last long. Therefore, the increase in consumption will be much smaller than for a permanent tax cut.

If Consumers Expect a Tax Cut to Be Temporary