Which is the MOST effective fiscal policy for influencing the economy?
A) a temporary tax rebate
B) a permanent tax cut
C) a tax hike with no response of consumption to an income change
D) tax hike that is matched by a government spending cut

Question

Quizplus · Accepted Answer

A permanent tax cut is generally more effective than a temporary tax rebate because it provides certainty to households and businesses, which encourages long-term planning, investment, and consumption. Option C is not effective because it assumes a constant consumption level regardless of changes in income, which is not realistic. Option D may have some positive impact on reducing the budget deficit, but it could also lead to a contraction in economic activity due to the decrease in government spending.

Which Is the MOST Effective Fiscal Policy for Influencing the Economy