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Suppose a fiscal stimulus of $200 billion is injected into the economy by lowering tax rates...

  1. Suppose a fiscal stimulus of $200 billion is injected into the economy by lowering tax rates for the current fiscal year, but in the next year, taxes will go back to normal. This type of stimulus will tend to be more effective compared to a permanent tax cut. Is it true of false?
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Answer #1

False, people will be knowing that taxes are going to increase and they will not create any increased consumption which would have been the case had this been a a permanent tax cut increasing the disposable income in the market.

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