Under an expansionary taxation policy, the government tries to stimulate economic growth by:

• A. restricting the money supply to control inflation
• B. raising tax rates to decrease aggregate demand
• C. increasing government spending while keeping taxes unchanged
• D. reducing tax rates to increase disposable income and consumption

Answer: (D)

Verified step by step guidance

1. Understand the goal of an expansionary fiscal policy, which is to stimulate economic growth by increasing aggregate demand.
2. Recall that expansionary fiscal policy typically involves either increasing government spending or reducing taxes to boost disposable income and consumption.
3. Analyze the options given: restricting money supply controls inflation (monetary policy), raising tax rates decreases aggregate demand (contractionary fiscal policy), increasing government spending while keeping taxes unchanged is expansionary, but the best way to increase consumption is by reducing tax rates.
4. Recognize that reducing tax rates increases disposable income, which encourages higher consumption and thus stimulates aggregate demand and economic growth.
5. Conclude that the correct approach under an expansionary taxation policy is to reduce tax rates to increase disposable income and consumption.