If households base their consumption spending on permanent income, then a tax increase will decrease consumption only if the tax is deemed permanent.

Question

Quizplus · Accepted Answer

If households base their consumption spending on permanent income, a tax increase will only decrease their consumption if they believe the tax increase is permanent. If they believe the tax increase is temporary, they may choose to maintain their current consumption levels and adjust their savings instead.

If Households Base Their Consumption Spending on Permanent Income, Then