Question

6. According to life-cycle models of consumption, a $1000 tax cut would have the largest impact on consumption spending when a. The tax cut is permanent b. The tax cut is temporary, and tax rates will steadily rise in subsequent years c. The tax cut is temporary, and tax rates will suddenly jump in subsequent years d. None of the above-A $1000 tax cut has the same impact on consumption spending regardless of whether it is temporary or permanent

Answer 1

The correct answer is ​​​​a. Tax cut is permanent.

The theory of life cycle hypothesis is that individuals seek to smooth consumption throughout their lifetime by borrowing when their income is low and saving when their income is high.

A permanent tax will have larger impact than a temporary tax.