Which of the following best explains why the federal tax rebates in 2008 and 2009 had almost no effects on aggregate demand?
A)According to the permanent income hypothesis, those one-time tax rebates did not affect consumption because they did not change taxpayers' permanent income.
B)According to the permanent income hypothesis, those one-time tax rebates did not affect consumption because taxpayers did not believe the rebates would occur.
C)According to Ricardian equivalence theorem, those tax rebates did not affect aggregate demand because they were accompanied by more government spending.
D)According to Ricardian equivalence theorem, those tax rebates did not affect aggregate demand because there were no direct expenditure offsets.

Question

Quizplus · Accepted Answer

The permanent income hypothesis suggests that the one-time tax rebates did not affect consumption because they did not change taxpayers' permanent income. Therefore, the rebates were viewed as a temporary increase in income and did not lead to an increase in spending. Ricardian equivalence theorem and government spending are not relevant to this explanation.

Which of the Following Best Explains Why the Federal Tax