Suppose that Congress passes a law to permanently cut taxes starting the next year. Assuming that consumers do not follow Ricardian equivalence, when would consumers adjust their consumption spending according to:

a. the Keynesian consumption functi on?
b. the Fisher two-period model with binding borrowing constraints?
c. the random-walk hyp othesis (the permanent-income hyp othesis with rational expectations) with no binding borrowing constraint?

Question

Suppose that Congress passes a law to permanently cut taxes starting the next year. Assuming that consumers do not follow Ricardian equivalence, when would consumers adjust their consumption spending according to:

a. the Keynesian consumption functi on?
b. the Fisher two-period model with binding borrowing constraints?
c. the random-walk hyp othesis (the permanent-income hyp othesis with rational expectations) with no binding borrowing constraint?

Quizplus · Accepted Answer

The Answer of Suppose that Congress passes a law to permanently cut taxes starting the next year. Assuming that consumers do not follow Ricardian equivalence, when would consumers adjust their consumption spending according to:

a. the Keynesian consumption functi on?
b. the Fisher two-period model with binding borrowing constraints?
c. the random-walk hyp othesis (the permanent-income hyp othesis with rational expectations) with no binding borrowing constraint?

Suppose That Congress Passes a Law to Permanently Cut Taxes