Problem 45

By boosting government spending or cutting tax rates, expansionary fiscal policy promotes aggregate demand. This can be accomplished by an expansionary policy in the following ways:

 

(1) Boosting consumption by increasing disposable income by lowering personal income or payroll taxes;

 

(2) boosting investment spending by boosting after-tax profits through tax reductions for businesses; and

 

(3) boosting government purchases by increasing federal spending on final goods and services and increasing federal payments to state and local governments to raise their final goods and services expenditures.