Question from Past Macroeconomics Qualifying Exam[]

Fall, 2003 - Question five - at George Mason University
What is the predictable impact on aggregate consumption of a one-time decrease in income taxes offering relief to all taxpayers but targeted more favorably at low income and high income households? In your answer refer to the following models:

  1. Keynesian consumption model;
  2. Life-Cycle hypothesis;
  3. Permanent income hypothesis

Discuss how the recent tax cut by the Republican Administration will affect short-term and long-term consumption in the United States. In your view, which of the three above-mentioned models is the most relevant in explaining the potential impact of the tax cut? Explain your reasoning.


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This macro-stub needs improving.