Final answer:
A decrease in business taxes is likely to increase aggregate demand by boosting after-tax profits that can be used for investment and dividends, influencing both business and consumer confidence positively. Government policy can also affect aggregate demand through changes in spending and tax rates. However, economists may disagree on the impact of tax cuts on aggregate demand due to various complex factors.
Step-by-step explanation:
A decrease in business taxes will tend to increase aggregate demand. This happens because lower taxes increase the after-tax profits of businesses, which can then be used for additional investment or to pay higher dividends to shareholders. More investment can lead to an increase in business confidence, and higher dividends can increase consumer confidence, both of which can fuel spending and investment.
Furthermore, government policy, such as changes in government spending and tax rates, is a powerful tool to affect aggregate demand. For example, lower interest rates set by a central bank like the Federal Reserve can stimulate consumption and investment demand, thereby increasing aggregate demand. Higher interest rates have the opposite effect, reducing aggregate demand.
Economists sometimes disagree on the effects of tax cuts on aggregate demand due to differing views on factors such as the role of government borrowing, the effectiveness of fiscal stimulus, and the influence of tax cuts on income distribution and consumer behavior. These disagreements are part of why economic policy-making can be complex and contentious.