When individuals are liquidity constrained and can borrow in the
private market only at very high rates of interest
1. transitory saving may take the form of investment
and disinvestment of consumer durables.
2. a tax cut will affect investment rather than
consumption as traditionally measured but will still shift the IS curve to the
right at a given real exchange rate.
3. a tax cut will leave wealth unchanged.
4. all of the above are true.
Choose the correct option.