Suppose That the Government Is Considering Two Tax Cuts, One

question 95

Multiple Choice

Suppose that the government is considering two tax cuts, one temporary and one permanent. Each cut will give each taxpayer the same amount in the first year. The permanent-income hypothesis predicts that:

• A) each tax cut will lead to the same amount of consumption in the first year.
• B) the temporary tax cut will lead to more extra consumption in the first year.
• C) the permanent tax cut will lead to more extra consumption in the first year.
• D) the temporary tax cut will lead to no extra consumption at all in the first year.

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Definitions:

Representative Firm

An idealized company in economic models which is designed to reflect the typical characteristics of a firm within a particular industry.

Cost Curves

Cost curves are graphical representations of the costs associated with producing varying quantities of goods, showing how costs change with changes in output.

Pure Competition

A market structure characterized by a large number of small firms, identical products, and free entry and exit, leading to price determination by market demand and supply.