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:

Dividends

Money paid out to shareholders by a business, generally coming from the business's profits.

Common Stock

A type of security that represents ownership in a corporation, giving holders voting rights and a share in the company's profits through dividends.

Retained Earnings

The portion of net income that is not distributed to shareholders but is kept by the company for reinvestment or debt payment.

End-Of-Period Spreadsheet

A tool used in accounting to compile all balances and adjustments at the end of an accounting period before the preparation of financial statements.