Combining Expansionary Fiscal and Supply-Side Policies for Growth

Steps:

• Identify fiscal policy for demand-side stimulus: increasing government investment boosts aggregate demand and growth.
• Identify supply-side policy: decreasing indirect taxes lowers production costs and consumer prices, enhancing supply and efficiency.
• Evaluate combinations: select options mixing expansionary fiscal with pro-growth supply-side measures.
• Eliminate contractionary or irrelevant policies that hinder growth.

Why B is correct:

• Increasing government investment expands AD via fiscal stimulus (Y = C + I + G + (X-M)), while decreasing indirect taxes shifts AS rightward by reducing costs, per supply-side economics.

Why the others are wrong:

• A: Increasing indirect taxes raises prices, contracting AS and offsetting fiscal stimulus.
• C: Increasing direct taxes reduces disposable income and AD; decreasing benefits is minor supply-side but overall contractionary.
• D: Raising interest rates and shrinking money supply tightens monetary policy, reducing investment and growth.

Final answer: B