Compared to a reduction in tax rates, a one-time tax rebate will exert
A) a weaker impact on aggregate demand because the increase in the incentive to earn and impact on long-term income will be smaller for the temporary tax cut.
B) a stronger impact on aggregate demand because both the increase in the incentive to earn and impact on long-term income will be larger for the temporary tax cut.
C) an identical impact on aggregate demand because the size of the budget deficit will be the same regardless of whether the tax cut is temporary or permanent.
D) an identical impact on aggregate demand because the incentive effects of a tax cut will be the same regardless of whether it is temporary or permanent.

Question

Compared to a reduction in tax rates, a one-time tax rebate will exert
A) a weaker impact on aggregate demand because the increase in the incentive to earn and impact on long-term income will be smaller for the temporary tax cut.
B) a stronger impact on aggregate demand because both the increase in the incentive to earn and impact on long-term income will be larger for the temporary tax cut.
C) an identical impact on aggregate demand because the size of the budget deficit will be the same regardless of whether the tax cut is temporary or permanent.
D) an identical impact on  aggregate demand because the incentive effects of a tax cut will be the same regardless of whether it is temporary or permanent.

Quizplus · Accepted Answer

A reduction in tax rates provides a permanent increase in the incentive to earn and impacts long-term income, whereas a one-time tax rebate only provides a temporary increase in the incentive to earn and impacts short-term income. Therefore, a reduction in tax rates would have a stronger impact on aggregate demand compared to a one-time tax rebate.

Compared to a Reduction in Tax Rates, a One-Time Tax