If the policy makers implement a tax cut as a discretionary fiscal policy to combat a recessionary gap, it may fail to achieve its objective if:
A)the households think of it as a permanent policy.
B)the households think of it as a temporary policy.
C)the households think of it as a 10 year program.
D)the households think of it as a loss of revenue for the government.

Question

Quizplus · Accepted Answer

If households perceive the tax cut as a temporary policy, they may choose to save the additional income rather than spend it, which would not stimulate economic activity and therefore would not effectively combat the recessionary gap. If households perceive the tax cut as a permanent policy, they may eventually increase their spending but it may take longer to do so. Therefore, the effectiveness of the tax cut as a discretionary fiscal policy may be hindered if households view it as a temporary measure. Choices A, C, and D are not relevant to the effectiveness of the policy.

If the Policy Makers Implement a Tax Cut as a Discretionary