Question

Consider two policies- a tax cut that will last for only for one year and a tax cut that is expected to be permanent. Which will stimulate greater spending by consumers? Which policy will have the greater impact on aggregate demand? Explain.

Answer 1

A permanent tax cut is expected to stimulate greater consumer spending and have a greater impact on aggregate demand compared to a temporary tax cut, due to its long-lasting effect on disposable income and economic planning.

Step-by-step explanation:

When comparing a temporary tax cut to a permanent tax cut, consumers are likely to react differently in terms of spending. A temporary tax cut is seen as a short-term benefit, and so it might lead to a limited increase in consumer spending as individuals may save the extra income for future taxes or use it to pay off debts. On the contrary, a permanent tax cut is expected to have a lasting effect on individuals' disposable income, leading to a more significant change in consumption patterns.

As for the impact on aggregate demand, a permanent tax cut would typically have a greater effect. This is because it influences long-term planning for both consumers and businesses, leading to increased investment, hiring, and consumption. A temporary tax cut, while it may provide a short-term boost to aggregate demand, does not encourage long-term economic planning and thus has a lesser impact on the economy overall.

Answer 2

A tax-cut that is expected to be permanent will have greater impact

Step-by-step explanation:

The tax- cut that is relied upon to be permanent will lead to more spending by buyers and it will greatly affect total interest. In such a case that a family expects a tax- cut to be long-term they will see it as a considerable addition because now they can buy and spend. Likewise, it will increase the aggregate demand by an enormous sum.