The US economy went into recession in March 2001 and in response, the government introduced a tax rebate programme which amounted to cheques of $300 or $600 being sent to about 2/3 of US households. The aim was to mitigate the recession. What would consumption theories discussed predict to be the outcome? A recession is a prolonged period of time when a nation's economy is slowing down, or contracting. Such a slow-down is characterized by a number of different trends, including: * People buying less stuff
* Decrease in factory production
* Growing unemployment
* Slump in personal income
* An unhealthy stock market
In 2001, when the government introduced a tax rebate program which amounted to cheques of $300 or $600 being sent to about 2/3 of US households, they expected the people receiving these rebate to spend the money and therefore to increase the demand on the market. The normal demand and supply theory tells us that an increase in demand can only be catered by an increase in supply or an increase in the price of the product. In this case it was the first option they were betting on. In theory the tax rebate helps the economy to get back on track, however it is more complex than that, since in time of recession, people prefer to repay their debts rather than to use the money to consume normal goods. However since the recession was not really that bad compared to 1985 or 2008, the economy got a boost since people used ¾ of their rebate in less than 3 months and this is perhaps one of the most important thing that helped the economy at that time.
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