Fiscal Policy and Aggregate Demand

A primary aim for fiscal policy is to help manage the economy through its influence on aggregate national output, real GDP.

An expansionary policy could take one or more of the following forms:

Cuts in personal income tax raise disposable income, boosting aggregate demand.

Cuts in sales (indirect) taxes to lower prices, raises real incomes, raising consumer demand.

Cuts in corporation (company) taxes to boost business profits, raise capital spending.

Cuts in tax rates on personal savings to raise disposable income, raising consumer demand.

New public spending on social goods and infrastructure, boosting personal incomes, raising aggregate demand.

Keynesians believe that fiscal policy can have powerful effects on aggregate demand, output, and employment when there is substantial spare capacity in an economy.

Monetarists believe that fiscal changes only have a temporary effect on aggregate demand and that monetary policy is a more effective tool for restraining or boosting inflationary pressures. Monetarists tend not to advocate using monetary policy for countercyclical adjustment of aggregate demand.