Question

According to a study by Kanishka Misra of the University of Michigan and Paolo Surico of the London Business School, “Almost half of American families did not adjust their consumption following receipt of the … 2008 tax rebate.” Don’t we expect that people will increase their consumption if their disposable income increases? Was there anything about the form of the 2008 tax cut that made it more likely that people would not respond by increasing their consumption spending? Briefly explain.

Answer 1

The 2008 tax rebate did not change the consumption pattern of US population because they considered such a rebate as a one time phenomena. Moreover, since the economy was going through a precarious time, people utilized the tax rebate in paying their debt or preferred savings. The large scale unemployment also made people wary to save for testing times ahead. Consumption pattern changes when you get a permanent hike in salary, which was not the case.