If consumers expect a tax cut to be temporary,
A) consumption remains unchanged.
B) the increase in consumption will be much larger than for a permanent tax cut.
C) the decrease in consumption will be much smaller than for a permanent tax cut.
D) the overall effects are much larger than for a permanent tax cut.
E) the increase in consumption will be much smaller than for a permanent tax cut.

Question

Quizplus · Accepted Answer

If consumers expect a tax cut to be temporary, they are more likely to save the extra income rather than spend it, as they expect their taxes to increase again in the future. This leads to a smaller increase in consumption compared to a permanent tax cut. Therefore, the increase in consumption will be much smaller than for a permanent tax cut.

If Consumers Expect a Tax Cut to Be Temporary