Answer to Question #204426 in Macroeconomics for Sue

Question

How fiscal policy influences aggregate demand and how these can be used to expand the economy? 

Answer 1

Fiscal policy influences aggregate demand through changes in taxation and government spending. Government spending and tax policy affect employment and household income, which then directly influence consumer spending and investment levels, which are components of aggregate demand.

Government spending and taxation can be used to expand an economy during recession or employment shocks through an expansionary fiscal policy. An expansionary fiscal policy involves tax cuts and increasing government spending in areas such as infrastructure and unemployment benefits. These policies increase aggregate demand in an economy.