Why were the effects of tax reductions that were part of the 2008 stimulus package passed by Congress neither as expansionary nor as long lasting as policymakers had hoped?

Question

Multiple select question.

Households spent much of the extra money on used goods and services.

Interest rates were simultaneously held too high.

Households saved most of the extra money.

Households used the extra money to pay down debts.

Answer 1

The effects of tax reductions that were part of the 2008 stimulus package were less expansionary and long-lasting than policymakers had hoped primarily due to the following reasons:

• Households saved most of the extra money.
• Households used the extra money to pay down debts.

While the other options may reflect some behavior of consumers, the main contributing factors to the limited effectiveness of the stimulus package were households choosing to save more and focus on debt repayment rather than increase spending in the economy. This reduced the overall expansionary impact that the policymakers aimed to achieve.