We have defined the aggregate demand in our last posts .Let us now discuss the factor that shifts the aggregate demand. In the most simplest way , any factor either external or internal that effects “Consumption, Investment or Government Expenditure” will shift the aggregate demand upward or downward. Now there are many shift factors that could possibly effect C,I or G. But one of the most important factors are the policy instruments of :
· Fiscal policy
· Monetary policy
The word fiscal come from the root word “FISC” which refers to the “Treasury” of a government. Fiscal Policy is one of the policy instruments of Macroeconomics that deal with government spending and taxing policies. Monetary policy refers to the maintenance and behavior of money supply , credit and central bank policies. We will further be discussing these two policy instruments in detail in the upcoming posts. But the logic behind these being a shift factor of Aggregate demand is quiet simple.
If Taxes are raised in Fiscal policy . This effect will lead to a decrease in consumption. Which as a result will Shift the Aggregate Demand curve downwards. Graphically:
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