Final answer:
The statement in question is false. Decreasing personal and business taxes generally leads to an increase in aggregate demand and, potentially, increased government spending due to automatic stabilizers responding to a weakening economy.
Step-by-step explanation:
The statement that a decrease in personal and business taxes will cause government spending and aggregate demand to decrease is false. In fact, a decrease in taxes tends to increase aggregate demand because individuals and businesses have more disposable income to spend. This is part of what is known as expansionary fiscal policy, which includes tax cuts and increases in government spending, especially during a recession. In such scenarios, lower taxes stimulate consumption and investment, while higher government spending can address unemployment and welfare needs, ultimately boosting aggregate demand.
Contrary to the notion that government spending decreases with tax cuts, the automatic stabilizers in the economy may lead to increased government spending as a response to weakened aggregate demand and higher unemployment. For example, during economic downturns, there can be an increased expenditure on unemployment benefits and welfare programs, as seen in the 2009 stimulus package.
In addition, Keynesian economics suggests that during severe economic downturns, only government action through increased spending and tax policy changes can effectively move aggregate demand to counteract a recession.