What Are the Aggregate Demand Policies?

Government policies can increase or decrease the overall level of demand in an economy.

In economics, aggregate demand measures the total amount of goods and services that consumers, businesses and the government want to purchase at given price levels. Government can influence aggregate demand through fiscal and monetary policies.

Significance

Aggregate demand shifts with changes in prices, investment and consumption patterns, and government spending. For example, reduced consumer spending arising from higher unemployment rates lowers aggregate demand, slowing economic growth and output.

Types

Government can use fiscal and monetary policies to affect aggregate demand. Fiscal policy involves the use of government spending and taxation to affect demand. Monetary policy involves regulation of the money supply to ensure sustained economic growth and price stability.

Fiscal Effects

Governments often use fiscal measures, such as increased spending, during recessions, when aggregate demand falls because of lower consumer spending or higher unemployment. The 2009 economic stimulus package, passed in the early weeks of President Barack Obama's administration, is an example.

Monetary Effects

Monetary policy that raises the money supply increases aggregate demand by reducing interest rates and thus the cost of borrowing. Reducing the money supply (usually to combat inflation) lowers aggregate demand by boosting interest rates.

History

During the Great Depression of the 1930s, English economist John Maynard Keynes advocated higher government spending, in the face of lower consumer and business purchases, to boost aggregate demand and stimulate the world economy.

References

• Principles of Economics (3rd edition); N. Gregory Mankiw; 2003

Resources

• Investopedia: Aggregate Demand
• U.S. House of Representatives: Importance of the Federal Reserve