Tax Cut Boosts Disposable Income and Consumption

Steps:

• Reducing direct taxes on earnings increases individuals' disposable income.
• Higher disposable income raises overall consumption spending in the short run.
• Increased consumption demands more domestically produced goods.
• Greater demand stimulates production, employment, and economic growth.

Why D is correct:

• Per the Keynesian consumption function (C = a + bYd), disposable income (Yd) directly drives consumption (C), increasing output and growth.

Why the others are wrong:

• A: Tax cuts do not cause food shortages or price hikes; no direct link exists.
• B: More imports could worsen trade deficits, harming domestic growth rather than helping it.
• C: Savings may rise but do not directly fuel short-run growth; consumption drives aggregate demand.

Final answer: D