Suppose that the government announces temporary tax cuts to stimulate consumers' consumption expenditures but the impact of this tax change on consumption is observed to be very small. This outcome might be explained by the fact that
A)this economy is suffering from the paradox of thrift.
B)the government has little credibility.
C)this economy is already at its long- run equilibrium.
D)the consumers anticipate that the tax change is only temporary and thus is unlikely to affect their "lifetime" income.
E)the impact of the policy is dampened by the automatic fiscal stabilizers.

Question

Quizplus · Accepted Answer

Consumers may not increase their consumption expenditures if they believe that the tax cut is temporary, and therefore will not impact their overall lifetime income. If consumers do not anticipate a permanent increase in their income, they may instead opt to save the additional funds from the tax cut, rather than spend it.

Suppose That the Government Announces Temporary Tax Cuts to Stimulate