Suppose That the Government Announces Temporary Tax Cuts to Stimulate

question 81

Multiple Choice

Suppose that the government announces temporary tax cuts to stimulate consumers' consumption expenditures but the impact of this tax change on consumption is observed to be very small. This outcome might be explained by the fact that

• A)this economy is suffering from the paradox of thrift.
• B)the government has little credibility.
• C)this economy is already at its long- run equilibrium.
• D)the consumers anticipate that the tax change is only temporary and thus is unlikely to affect their "lifetime" income.
• E)the impact of the policy is dampened by the automatic fiscal stabilizers.

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