A binding borrowing constraint will ______ the potency of an announced future tax cut to influence aggregate demand but will ______ the potency of a temporary tax cut.
A) not affect; increase
B) increase; not affect
C) decrease; increase
D) increase; decrease

Question

Quizplus · Accepted Answer

A binding borrowing constraint will not affect the potency of an announced future tax cut to influence aggregate demand because households will not increase their current consumption in anticipation of the future tax cut. However, a temporary tax cut will increase the potency of a binding borrowing constraint because households will increase their current consumption in anticipation of the temporary tax cut.

A Binding Borrowing Constraint Will ______ the Potency of an Announced