Question

policy ge rate 's and 8. Does fiscal policy have a strong impact on aggregate demand? Did the shift of the federal budget from deficit to surplus during the 1990s weaken aggregate demand? Did the government spending increases and large budget deficits of 2008-2011 strengthen aggregate demand? Discuss.

Answer 1

Fiscal policy can have a strong impact on aggregate demand but it depends on the crowding-out effect and the multiplier effect. An increase in government spending causes the interest rate to rise and a higher interest rate reduces investment spending in the crowding-out effect. The multiplier effect is said to multiply government spending and raise aggregate demand. When the government increases its purchases, the aggregate demand for goods and services could rise,depending on whether the multiplier effect or the crowding-out effect is larger.

The federal budget indicates that fiscal policy was relatively restrictive during the 1990s. When a country goes from a deficit to a surplus, this indicates a stricter, more conservative fiscal policy, which mean low spending. When low spending is present, the aggregate demand is lower as well because it includes government spending.

Yes, when government is spending more, like in the years of 2008-2011, the aggregate demand increases as well.