If households and firms anticipate that a current government spending increase will be followed by future tax hikes to balance the budget, the immediate effect of the spending multiplier will likely be larger than if no future tax hikes were expected.
0
1
Tags
Economics
Economy
Introduction to Macroeconomics Course
Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
CORE Econ
Social Science
Empirical Science
Science
Analysis in Bloom's Taxonomy
Cognitive Psychology
Psychology
Related
Crowding In of Private Spending
Impact of Expectations on Fiscal Stimulus
The Role of Credibility in Fiscal Policy Announcements
A government announces a one-time tax rebate for all households to stimulate the economy. Simultaneously, credible government sources signal that taxes will need to be raised significantly in the following year to address the budget deficit caused by the rebate. How will this combination of actions most likely influence the size of the fiscal multiplier associated with the tax rebate?
Expectations and Fiscal Policy Effectiveness
If households and firms anticipate that a current government spending increase will be followed by future tax hikes to balance the budget, the immediate effect of the spending multiplier will likely be larger than if no future tax hikes were expected.