If households view a tax cut as being temporary, how does the tax cut affect aggregate demand?
A)It has no affect on aggregate demand.
B)It has more of an effect on aggregate demand than if households view it as permanent.
C)It has the same effect on aggregate demand than if households view the cut as permanent.
D)It has less of an effect on aggregate demand than if households view the cut as permanent.

Question

Quizplus · Accepted Answer

When households view a tax cut as being temporary, they are less likely to increase their spending as they do not expect the increase in disposable income to be permanent. This means that the tax cut has less of an effect on aggregate demand than if households view it as permanent.

If Households View a Tax Cut as Being Temporary, How