If households view a tax cut as temporary, then the tax cut
A)has no effect on aggregate demand.
B)has more of an effect on aggregate demand than if households view it as permanent.
C)has the same effect as when households view the cut as permanent.
D)has less of an effect on aggregate demand than if households view it as permanent.

Question

Quizplus · Accepted Answer

When households perceive a tax cut as temporary, they are less likely to significantly increase their spending because they anticipate that their long-term income will not change substantially. As a result, the immediate boost to aggregate demand is smaller compared to when they believe the tax cut is permanent and adjust their spending habits more substantially.

If Households View a Tax Cut as Temporary, Then the Tax