Late 2010, Congress renewed for a two-year period the tax cuts first passed by the Bush administration. The original Bush tax cuts were set to expire in 2011, 10 years after their original passage.
a. According to the theories of consumption in this chapter, what effect would you expect the original tax cuts to have on consumption?
b. During the debate on the renewal of the tax cuts, many argued that a failure to extend the tax cuts was a bad policy during a recession. Does the analysis presented in this chapter suggest that this argument is correct? Briefly explain.