For temporary shocks, it seems like the supply of real output should be more interest-elastic than for permanent shocks. Intuitively, if the real interest rate is temporarily high, even people who won't work more overall will work more now . With lump-sum taxation and Ricardian equivalence, taxation is just a negative wealth shock. Insofar as the lifetime wealth effect of temporary increase is less than permanent increase, the labor supply response to a permanent tax increase is greater than to a temporary one. Similarly, with distortionary taxation, the labor supply response to a temporary tax hike exceeds the response to a permanent one.
People just enjoy leisure and wait for taxes to fall back to their standard level.
K-P have a lot of trouble fitting the basic facts. Aside from the impact of money growth on nominal interest rates, money simply doesn't matter for these theories. B. RBC fiscal policy channels are similarly problematic. D. Monetary policy barely mentioned at all. If labor supplied is responding to high real interest rates, or if the labor supply curve shifts due to the negative wealth effect, then observed labor productivity should fall .