Expansionary Policies Boost Employment

Steps:

• Identify goal: Increase employment requires boosting aggregate demand (AD) via fiscal and monetary policies.
• Fiscal policy: Decreasing taxation raises disposable income, increasing consumption and AD.
• Monetary policy: Decreasing interest rates lowers borrowing costs, boosting investment and AD.
• Combine: Both expansionary measures together maximize AD growth, leading to higher output and employment.

Why B is correct:

• B pairs expansionary fiscal (cut taxes) and monetary (cut rates) policies, directly increasing AD per Keynesian model, where higher AD raises employment via the multiplier effect.

Why the others are wrong:

• A: Tax cut boosts AD, but higher rates reduce investment, creating conflicting effects that weaken net employment gains.
• C: Rate cut boosts AD, but higher taxes reduce consumption, offsetting gains and limiting employment rise.
• D: Both higher taxes and rates contract AD, reducing output and employment.

Final answer: B