How can a decrease in taxes impact aggregate demand?

A decrease in taxes increases disposable income for households, as families have more of their earnings available to spend after taxes are deducted. This increase in disposable income typically leads to higher consumption, as households are likely to spend a portion of this additional income on goods and services. The rise in consumption contributes to an increase in aggregate demand, which reflects higher overall spending in the economy. As more money circulates through consumer spending, businesses may respond by increasing production, which can further stimulate economic activity. Thus, the relationship between lower taxes and higher disposable income forms a direct link to increased aggregate demand.