Tax Cuts Boost Economic Activity

Steps:

• Direct tax reductions increase disposable income for consumers and profits for businesses.
• Higher disposable income raises consumer spending, increasing consumption.
• Lower business taxes reduce costs, encouraging firms to invest more in capital and expansion.
• Elevated consumption and investment drive up aggregate demand, leading to higher national output.

Why D is correct:

• In Keynesian economics, tax cuts shift the consumption and investment functions upward, increasing aggregate demand (AD = C + I + G + NX) and thus equilibrium output (Y).

Why the others are wrong:

• A: Consumption increases with more disposable income, not decreases.
• B: Tax cuts stimulate, not contract, all components.
• C: Investment rises due to lower business taxes, not falls.

Final answer: D