When would a temporary tax cut be ineffective in stimulating aggregate demand?
A) if the MPC is relatively high
B) if the economy is in a recessionary gap
C) if the short-run aggregate supply curve is relatively flat
D) if people base consumption decisions on their level of permanent income

Question

When would a temporary tax cut be ineffective in stimulating aggregate demand?  
A) if the MPC is relatively high 
B) if the economy is in a recessionary gap 
C) if the short-run aggregate supply curve is relatively flat 
D) if people base consumption decisions on their level of permanent income

Quizplus · Accepted Answer

If people base their consumption decisions on their level of permanent income, then a temporary tax cut will not lead to increased consumption and therefore will not be effective in stimulating aggregate demand. This is because people will view the tax cut as temporary and therefore choose not to increase their current consumption.

When Would a Temporary Tax Cut Be Ineffective in Stimulating