Question

If households view a tax cut as temporary, then the tax cuta.has less of an effect on aggregate demand than if households view it as permanent. b.has the same effect as when households view the cut as permanent. c.has more of an effect on aggregate demand than if households view it as permanent. d.has no effect on aggregate demand.

Answer 1

Answer:

has less of an effect on aggregate demand than if households view it as permanent

Explanation:

Tax Cut is an expansionary fiscal policy; where government uses its expenditure, receipt policy to increase aggregate demand.

A tax cut affects aggregate demand by increasing it, as it increases the disposable income & purchasing power. However: if households view a tax cut as temporary, it has less impact then that if it is viewed as permanent.

Such because, a tax cut considered temporary would be seen as a temporary increase in disposable income, purchasing power. However, consumers usually weigh marginal utility of a money unit gained less than marginal disutility of a money unit lost. Simply, increasing standard of living is easier, but degrading even temporarily improvised standard of living again is difficult. So, Consumers are averse to reduce their once raisen standard of living . This would make them change their aggregate demand less firstly itself, if the tax cut is considered to be temporary (to avoid disutility of degraded standard of living after tax cut reversal).