Compared to a Permanent Reduction in Tax Rates, a Temporary

question 153

Multiple Choice

Compared to a permanent reduction in tax rates, a temporary tax cut will generally

• A) exert a larger impact on output and employment because its effects are immediate, long-lasting, and do not add much to the national debt.
• B) exert a smaller impact on output and employment because the temporary cut will not exert much impact on long-term income or the incentive to earn.
• C) exert a larger impact on output and employment because the temporary tax cut will lead to a larger budget deficit.
• D) exert an identical impact on output and employment because the incentive effects will be the same regardless of whether the tax cut is temporary or permanent.

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Definitions:

Heuristics

Shortcuts or rules of thumb used to make decisions.

Loss Aversion Technique

A psychological strategy used in various fields, including investing and marketing, that leverages the individuals’ tendency to prefer avoiding losses to acquiring equivalent gains.

Decision Making

The process of making choices by identifying a decision, gathering information, and assessing alternative resolutions.

Affect Heuristic

A mental shortcut used in decision making that involves relying on current emotions to evaluate the desirability and risks of different options.