In what way do changes in fiscal policy typically impact aggregate demand?

Changes in fiscal policy typically impact aggregate demand primarily by changing government spending or taxation levels. When the government increases its spending, it injects more money into the economy, which boosts demand for goods and services. This can help stimulate economic activity, especially during periods of recession or economic slowdown. Conversely, if the government reduces spending or increases taxes, it can lead to a decrease in aggregate demand, as consumers have less disposable income to spend.

This mechanism is fundamental to understanding how fiscal policy can influence overall economic performance. For example, during a downturn, increased government spending can lead to higher employment and income levels, further promoting demand. Tax cuts can similarly enhance disposable income for consumers, encouraging them to spend more. Thus, fiscal policy directly manipulates these elements, making it a powerful tool for managing economic conditions and influencing aggregate demand.