According to the traditional viewpoint, a tax cut without a cut in government spending:
A)raises consumption in both the short run and the long run.
B)lowers consumption in both the short run and the long run.
C)raises consumption in the short run but lowers it in the long run.
D)lowers consumption in the short run but raises it in the long run.

Question

Quizplus · Accepted Answer

According to the traditional viewpoint, a tax cut without a cut in government spending may initially increase consumption in the short run as people have more disposable income to spend. However, in the long run, without a cut in government spending, the tax cut will lead to an increase in government borrowing, putting upward pressure on interest rates and ultimately leading to lower consumption as borrowing becomes more expensive. Therefore, a tax cut without a cut in government spending will raise consumption in the short run but lower it in the long run.

According to the Traditional Viewpoint, a Tax Cut Without a Cut