If a consumer is in a position in which a borrowing constraint limits his or her current consumption and a one-time tax is levied on his or her current income, then the tax will:
A) lower the consumer's future consumption.
B) not affect the consumer's future consumption.
C) increase the consumer's future consumption.
D) have no effect on either current or future consumption.

Question

Quizplus · Accepted Answer

Since the consumer is already at a borrowing constraint, any reduction in current income due to a tax will not change their consumption behavior; they cannot borrow more to maintain their current consumption level. Thus, their future consumption remains unaffected as they were already consuming at their maximum capacity given the borrowing constraint.

If a Consumer Is in a Position in Which a Borrowing