Question

Consider the following information:

c is the consumption profile, w is the wage or labor earnings profile, and line a-a is the initial wage profile. Suppose there is an announced change in tax policy of a tax cut, area c, and a tax increase later, area d. What is the impact of this policy on consumption if the change in policy is believed by the consumer at the beginning of their planning horizon?

Answer 1

The individual will plan to spend or consume more of his wages than usual; since he believes there'll be a tax cut.

Step-by-step explanation:

C = consumption

W = wages

Note: No graph is attached to the question so we can't make use of certain information in the question.

Suppose there is an announced change in tax policy - a tax cut/reduction - and a tax increase later; what is the impact of this policy on consumption if the consumer believes that the policy will be implemented?

Reasoning as an economist, the first reaction of a rational consumer is to begin to consume more since he believes the tax reduction policy will be implemented.

NOTE that sometimes the government or financial ministry in a country intentionally announce policies just so citizens can begin adjusting their consumption and investment patterns in line with them. They do not necessarily follow up with implementation of the policies.

So for a consumer who believes that there'll be a tax cut, he'll be excited and will either consume more of his present wage or consume all and borrow or dissave.