Compared to a Reduction in Tax Rates, a One-Time Tax

question 3

Multiple Choice

Compared to a reduction in tax rates, a one-time tax rebate will exert

• A) a weaker impact on aggregate demand because the increase in the incentive to earn and impact on long-term income will be smaller for the temporary tax cut.
• B) a stronger impact on aggregate demand because both the increase in the incentive to earn and impact on long-term income will be larger for the temporary tax cut.
• C) an identical impact on aggregate demand because the size of the budget deficit will be the same regardless of whether the tax cut is temporary or permanent.
• D) an identical impact on  aggregate demand because the incentive effects of a tax cut will be the same regardless of whether it is temporary or permanent.

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