Expansionary Policies Boost Aggregate Demand

Steps:

• Recall expansionary fiscal policy increases government spending or cuts taxes to raise aggregate demand.
• Recall expansionary monetary policy increases money supply to lower interest rates and stimulate investment.
• Assess each option: expansionary fiscal requires net stimulus from spending/taxes; monetary requires money supply growth.
• Select option with all components clearly expansionary for certain overall effect.

Why C is correct:

• C features increased spending and decreased taxes (expansionary fiscal per Keynesian model) plus increased money supply (expansionary monetary via liquidity effect), guaranteeing aggregate demand rise.

Why the others are wrong:

• A: All elements—spending cut, tax hike, money supply cut—are contractionary, reducing demand.
• B: Spending and money supply cuts are contractionary, offsetting any tax cut benefit.
• D: Tax increase offsets spending rise in fiscal policy, creating ambiguous net effect despite monetary expansion.

Final answer: C