Elasticity Topic Index

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Real Per-Capita Disposable
Personal Income

In July 2001 President Bush signed into law a $1.35 trillion tax cut that reduced marginal tax rates across the board. The President said that the tax cuts would help boost the economy, which was in recession at the time. The concept of income elasticity of demand is useful in understanding how consumer spending on specific goods and services is affected by an increase in disposable income. An increase in disposable income will result in an increase in the quantity of normal and luxury goods and services purchased. If indeed consumers respond to the increase in disposable income by increasing their spending on goods and services, the tax cut will have a stimulative effect on the macroeconomy.

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