Expansionary fiscal policy stimulates demand to lower cyclical unemployment

Steps:

• Cyclical unemployment arises from insufficient aggregate demand during recessions.
• Fiscal policy adjusts government spending and taxation to influence demand.
• Expansionary fiscal policy increases demand by raising spending or cutting taxes.
• This shifts the aggregate demand curve rightward, boosting output and employment.

Why B is correct:

• Increasing the budget deficit via higher government spending or lower taxes directly expands aggregate demand, per the Keynesian multiplier effect, reducing cyclical unemployment.

Why the others are wrong:

• A: Increasing direct taxation reduces disposable income and aggregate demand, worsening cyclical unemployment.
• C: Increasing the budget surplus through spending cuts or tax hikes contracts aggregate demand, raising unemployment.
• D: Increasing the money supply is monetary policy, not fiscal, and primarily affects interest rates rather than direct government budget actions.

Final answer: B