If households view a tax cut as being temporary, how does the tax cut affect aggregate demand?
A) It has no effect on aggregate demand.
B) It has a stronger effect on aggregate demand than if households view the cut as permanent.
C) It has the same effect on aggregate demand than if households view the cut as permanent.
D) It has a weaker effect on aggregate demand than if households view the cut as permanent.

Question

Quizplus · Accepted Answer

If households view a tax cut as being temporary, it is less likely that they will increase their spending as a result because they know the tax cut will eventually expire. As a result, the tax cut has a weaker effect on aggregate demand than if households view the cut as permanent.

If Households View a Tax Cut as Being Temporary, How