A temporary tax cut would not be effective in stimulating aggregate demand if
A)the tax cut were large
B)the MPC were relatively high
C)the economy were in a contractionary gap
D)the short-run aggregate supply curve were relatively flat
E)people based consumption decisions on their level of permanent income

Question

Quizplus · Accepted Answer

If people base their consumption decisions on their level of permanent income, a temporary tax cut would not significantly impact their spending behavior. This is because people would view the tax cut as a temporary increase in income that will eventually be taken away, and therefore not change their long-term consumption patterns.

A Temporary Tax Cut Would Not Be Effective in Stimulating