ECONOMIC POLICY 3
highways. In the short run, the primary effect of fiscal policy is on the aggregate demand for
goods and services while in the long run fiscal policy influences saving, investment, and growth.
Firstly, the government is recommended to increase its own purchases of services and goods, and
this shifts the aggregate-demand curve directly to the right (Williams, 2016). Suppose, for
instance, that the Macropoland Department of Defense places a $30 billion contract for brand
new fighter planes with Airbus, the large aircraft manufacturer. This contract boosts the demand
for the usual output produced by Airbus, which compels the company to employ more workers
and increase production. Secondly, the government is to decrease taxes. When the government
slashes taxes and stimulates customer spending, profits and earnings rise, which moreover
stimulates customer spending (Sims, 2016). Tax cuts shift the aggregate-demand curve to the
right. Thirdly, the government is to make transfer payments - which are payments made to the
household sector with no expectations of the productive campaign in return (Rey, 2015). The
three common transfer payments include: unemployment indemnification to the unemployed,
welfare to the poor, and Social Security benefits to the disabled and elderly. This helps to boost
the economy.
In conclusion, the government should circumvent being the reason for economic
oscillations. Hence, most economists advise against sudden and large changes in monetary and
fiscal policies, for such changes are probable to cause oscillations in the aggregate call.
Moreover, when large alterations do happen, it is crucial that fiscal and monetary policymakers
be aware of and respond to each other’s actions. Expansionary fiscal policies increase the level
of aggregate demand, either through the swell in government purchases or through the decrease
of taxes. This is most appropriate to enable an economy producing under its potential GDP to
recover from a recession.
