Tax Cut Boosts Disposable Income and Domestic Demand

Steps:

• Reducing direct taxes on earnings increases individuals' disposable income.
• Higher disposable income raises overall consumption spending in the short run.
• Increased consumption stimulates aggregate demand, promoting economic growth.
• This growth particularly benefits domestically produced goods through higher local purchases.

Why D is correct:

• Per the Keynesian consumption function (C = a + bYd), disposable income (Yd) rises, directly increasing consumption of domestic goods and fueling short-run GDP growth.

Why the others are wrong:

• A: Tax cuts expand demand without causing food shortages; prices may stabilize or fall with growth.
• B: Luxury imports could rise, but this shifts spending abroad, not positively aiding domestic economic growth.
• C: Savings may rise marginally, but the dominant short-run effect is increased consumption, not savings.

Final answer: D