How do observations square with permanent income hypothesis

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Reference no: EM132126454

Question: In 2001.3, the Bush Administration directed the Treasury to send checks of $300 to $600 to most taxpayers as an ‘‘advance'' payment on the 2002 tax reduction, in order to pull the economy out of recession. The next quarter, in which there were no tax refunds, purchases of motor vehicles and parts (cars) rose $48 billion, stimulated by ‘‘zero-interest'' financing, while other consumption rose $45 billion (all figures SAAR in billions of chained 1996 dollars). In 2002.1, when the permanent tax cut went into effect, car sales fell $34 billion while other consumption rose $84 billion. In 2002.2, car sales were flat while other consumption rose $33 billion. How do these observations square with the permanent income hypothesis? What can you say about the relative impact of monetary and fiscal policy on consumer spending?

Reference no: EM132126454

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