A person's permanent income is the present value of his expected income today and in the future. In a 2-period model this is given by: Permanent Income = Income Today+Income Tomorrow/(1+i) Consider fiscal policy where government increases current spending to increase aggregate demand and finances that spending by debt which must be paid off in the future with higher taxes. 1.A person with rational expectations will know that if the increase in government spending is financed by debt, that the government will have to raise taxes in the future to pay off that debt . 2.That person will lower his expected future income by subtracting the value of future expected taxes from his future income. 3.The net effect on his Permanent Income is Zero and because there is no change in his Permanent Income his current and future consumption are unchanged. The increase in currrent income caused by the government spending moves the person from A to B . If the person's expectations are rational and he knows the government has an incentive to lie, his expected future income will be A . In this case, the effect of deficit spending is [ Select ]