Now lets have a look at the Effect of Govt Expenditure. An increase in Govt Expenditure will as a consequence lead to an increase in the investment that as a result will move the aggregate demand curve upwards. Graphically:
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Thus we see that fiscal policy bring various changes in consumption, Govt Exp and Investment which shows an upward or downward movement in Aggregate Demand Curve. A downward effect of Aggregate will result a slow down of Production(Growth) in economy.
On the other hand , Monetary Policy Effects the Aggregate Demand through Interest Rate. We already know that an increase in interest rate will Decrease Investment or vice versa. But the effect of Fiscal policy over the economy differs from the effect of Monetary Policy over an economy. It depends on the economic Situation of Every country. Interest rate has a great level of effect over the economy which leads to changes in investment that will also change Aggregate demand .
Our next topic will cover up Aggregate Supply and its determinants.
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