How fiscal policy can be used to influence aggregate demand
Governments can boost or slow total spending in the economy by changing how much they spend or how much they tax. Spending more or cutting taxes puts more money into people's hands, raising aggregate demand.
Formula
AD = C + I + G + (X − M)
Real World
During the 2008 financial crisis, the UK government launched a £20 billion fiscal stimulus, increasing G directly — this boosted AD and helped prevent a deeper recession.
Exam Focus
Always state the transmission mechanism: e.g. ↑G → ↑AD → ↑real GDP (if spare capacity) — don't just say 'AD rises'.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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