A temporary tax cut is not likely to be effective in stimulating aggregate demand if:
A)the tax cut is large.
B)the MPC is relatively high.
C)the economy experiences a contractionary gap.
D)the short-run aggregate supply curve is relatively flat.
E)people based consumption decisions on their level of permanent income.

Question

Quizplus · Accepted Answer

If people base their consumption decisions on their level of permanent income, then a temporary tax cut will not affect their behavior much because they view it as a one-time windfall rather than a permanent increase in income. Therefore, the tax cut will not be effective in increasing aggregate demand.

A Temporary Tax Cut Is Not Likely to Be Effective