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3.2:4 Macroeconomic Policy Fiscal Policy
Specification Candidates should understand fiscal policy can have both macro and
microeconomic functions. They should be able to explain how it could be used to influence
aggregate demand and aggregate supply, and also how government spending and taxation
can affect the pattern of economic activity.…

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Fiscal Policy and Aggregate Demand
Government spending and taxation changes
have an effect on aggregate demand. A rise
in government spending, with the price level
constant, will increase aggregate demand,
pushing the AD curve to the right as in figure
2. Equally, a cut in taxes will affect
aggregate demand.…

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The Multiplier
The multiplier is a rise in government spending (G) will not just increase aggregate demand
by the value of the increase in G. There will be a multiple increase in aggregate demand. This
multiplier effect will be larger the smaller the leakages from the circular flow. In a…

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The fiscal policy transmission mechanism
This flowchart identifies some of the channels involved with the fiscal policy transmission
mechanism ­ in the example shown we focus on an expansionary fiscal policy designed to
boost demand and output

The multiplier effects of an expansionary fiscal policy depend on how much spare…

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However when it is used to influence directly the level of aggregate demand, it becomes an
example of the Demand Side Policy or Demand Management.
Inflation an increase in government spending or a fall in taxes which leads to a higher
budget deficit or lower budget surplus will have a…

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By providing goods and services directly, the government influences the level of provision ig
the goods, such as public and merit goods. If left to the market forces, these goods would
either be under provided, or not provided at all.
Through public spending and taxes, the government influences the pattern…

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Aggregate Demand

Contractionary Fiscal


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