Expansionary Policies Shift Aggregate Demand Rightward

Steps:

• Lower income taxes increase disposable income, raising consumption and aggregate demand (AD).
• Higher net exports increase AD through greater exports or lower imports.
• Combined, these shifts move AD right, raising both price level and real output in the AD-AS model.
• Other combinations yield mixed or contractionary effects on AD.

Why B is correct:

• Both falling income taxes and rising net exports expand AD per the AD curve formula (AD = C + I + G + NX), increasing equilibrium price and output.

Why the others are wrong:

• A: Tax fall boosts AD, but net export decrease offsets it, likely neutral effect.
• C: Tax rise reduces consumption; net export decrease cuts AD further, lowering price and output.
• D: Tax rise contracts AD, while net export increase expands it, resulting in ambiguous net impact.

Final answer: B