HOW FISCAL POLICY INFLUENCES AGGREGATE DEMAND

The government can influence the behavior of the economy not only with monetary policy but also with  fiscal policy. Fiscal policy refers to the government’s choices regarding the overall level of government purchases or taxes. Earlier in the book, we examined how fiscal policy influences saving, ‘investment, and growth in the long run. In the short run, however, the primary effect of fiscal policy is on the aggregate demand for goods and services.