Answer to Question #214523 in Macroeconomics for Timothy

Question

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

Answer 1

Fiscal policy has a major influence on the aggregate demand through changes in taxation and government expenditure. Government expenditure and taxes have an effect on employment and household income, which affects some of components of the aggregate demand which are consumer income and levels of investments.

Government expenditure and tax policy 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. Thus increasing aggregate demand of an economy.