Which of the following correctly orders the effects of a decrease in taxes on the economy?

• A. Increase in disposable income, decrease in consumption, decrease in aggregate demand
• B. Decrease in disposable income, decrease in consumption, decrease in aggregate demand
• C. Decrease in disposable income, increase in consumption, increase in aggregate demand
• D. Increase in disposable income, increase in consumption, increase in aggregate demand

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the relationship between taxes and disposable income. When taxes decrease, individuals have more income left after paying taxes, which means disposable income increases.
2. Step 2: Recognize how changes in disposable income affect consumption. An increase in disposable income typically leads to an increase in consumption because people have more money to spend.
3. Step 3: Connect consumption changes to aggregate demand. Since consumption is a major component of aggregate demand, an increase in consumption will lead to an increase in aggregate demand.
4. Step 4: Summarize the chain of effects: a decrease in taxes leads to an increase in disposable income, which causes an increase in consumption, and this in turn increases aggregate demand.
5. Step 5: Use this logical sequence to evaluate the given options and identify the correct ordering of effects.