Explain why permanent tax cuts are likely to lead to bigger increases in consumer spending then temporary tax cuts do. if you can, try to explain a little in terms of the consumption function as this question was posed in that chapter.

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The "Keynesian consumption function" is an effort to quantify people's spending habits in relationship to GDP. It assumes that as GDP increases, people will have and thus spend more money. The amount of money people spend above that for necessities ("autonomous consumption") is a function of both their disposable income...

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The "Keynesian consumption function" is an effort to quantify people's spending habits in relationship to GDP. It assumes that as GDP increases, people will have and thus spend more money. The amount of money people spend above that for necessities ("autonomous consumption") is a function of both their disposable income and the amount they tend to save. In theory, a tax cut will increase disposable income, and thus directly increase the ability of consumers to spend money. However, if the tax cut is only temporary, people might decide to save rather than spend the extra money, and therefore a short term tax cut could be ineffective as a stimulus to spending.

The next important factor has to do with the beneficiaries of the tax cut and the state of the economy. If the populace is highly indebted, it will use money from the tax cut to pay down debt rather than consume. Also, tax cuts and subsidies for the poor result in an immediate increase in consumption. A poor or struggling family that has a slightly higher income will spend it on things like new shoes and clothing for their kids, replacing an unreliable car, and similar consumer goods. Tax cuts for the wealthy are more problematic. First, tax cuts, as exemplified by those passed by the Republican Congress in 2017, decrease revenue and thus require cuts to social services for the poor and a decrease on spending on infrastructure such as public transit and healthcare that benefits the middle classes, reducing their disposable income and spending. Next, the wealthy may invest rather than spend the money. Third, such tax cuts increase income inequality. Fourth, and worst from an economic point of view, such tax cuts decrease government revenue, leading to government indebtedness which increases inflation.

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In terms of the consumption function, a permanent tax cut is likely to lead to people having a higher marginal propensity to consume than a temporary tax cut will.

The reason for this is that people will be able to count on having the tax cut continue for a long time.  They will know that the money is going to keep coming so they will be able to plan ahead.

If the tax cut is temporary, people won't know if it will last.  So they're more likely to save the money rather than spending it.  This lowers the MPC.

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