Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 30: Problem 47

What is a potential problem with a temporary tax increase designed to increase aggregate demand if people know that it is temporary?

Short Answer

Expert verified
The potential problem with a temporary tax increase designed to increase aggregate demand, if people know it is temporary, is that it might not effectively stimulate the economy. People may choose to save more or postpone their spending, and businesses might delay investments, waiting for the lower tax rates to return. This could result in a decrease, instead of an increase, in aggregate demand, leading to a failure in achieving the intended economic stimulus.

Step by step solution

01

Understanding the objective of a temporary tax increase

A temporary tax increase is designed to increase aggregate demand. The rationale behind this is to stimulate economic activity, which might be desired during an economic downturn or in a period of recession. The government may do this by increasing taxes temporarily, expecting people to spend more and businesses to invest more, thus boosting aggregate demand in the short term.
02

Considering how people might respond if they know the tax increase is temporary

If people know that the tax increase is temporary, they might change their behavior accordingly. Instead of spending and consuming more, they might choose to save more or postpone their spending until after the tax increase has ended. Similarly, businesses might put off investments until the tax rate returns to its lower level.
03

Identifying the potential problem with a temporary tax increase

The potential problem with a temporary tax increase designed to increase aggregate demand, if people know it is temporary, is that it might not have the intended effect of stimulating the economy. People might choose to save more or postpone their spending and businesses might delay investments, waiting for the lower tax rates to return. This could result in a decrease, rather than an increase, in aggregate demand, leading to a failure in achieving the intended economic stimulus.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

What is the main advantage of automatic stabilizers over discretionary fiscal policy?

What is the difference between discretionary fiscal policy and automatic stabilizers?

What is the difference between a budget deficit, a balanced budget, and a budget surplus?

When governments run budget deficits, how do they make up the differences between tax revenue and spending?

Is expansionary fiscal policy more attractive to politicians who believe in larger government or to politicians who believe in smaller government? Explain your answer.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free