If people base their spending decisions more on permanent income than current income,then:
A)consumption spending will be more responsive to a temporary change in income than a change in permanent income.
B)shifts in aggregate supply will be less predictable than if spending was based on current income.
C)consumption spending will fluctuate more widely than if such spending was determined by current income.
D)shifts in short-run aggregate supply will be more predictable than if spending was based on current income.
E)attempts to fine-tune the economy with temporary tax rate adjustments will be less effective.

Question

Quizplus · Accepted Answer

If people base their spending decisions more on permanent income than current income, attempts to fine-tune the economy with temporary tax rate adjustments will be less effective. This is because tax rate adjustments will only affect current income, whereas people will still base their spending decisions on their permanent income, which is unaffected by temporary changes. As a result, the impact of temporary tax rate adjustments on consumption spending will be limited.

If People Base Their Spending Decisions More on Permanent Income