This document discusses how government spending and taxation impact aggregate demand. It explains that aggregate demand is made up of consumption, investment, government spending, and net exports. The document then outlines different types of government spending and taxation, and how fiscal policy tools like cutting taxes or raising spending can be used to stimulate aggregate demand and reduce unemployment by shifting the aggregate demand curve to the right. However, this may lead to inflation. The document also discusses using expenditure-reducing or expenditure-switching fiscal policies to impact trade balances and imports.

1. It’s Influence on Aggregate Demand
Curve.
Prepared by:
Vivek Thummar. (Roll no 41)
Jayprakash Tiwari. (Roll no 42)
Under guidance of
Prof:Paresh Patel

2.  Is all about Government Spending & Taxation
 Announced in the Budget and Autumn
Statements by the Chancellor
 Aggregate Demand = Consumption +
Investment + Govt Spending + Net Exports.

3.  This is expenditure by the government on
this things we need as a state such as
defence or education.
 Makes up the Govt spending in Aggregate
Demand

4.  Many Different Forms of Taxation in the UK
 Indirect Taxes: Taxes that affect everyone
such as VAT
 Direct Taxes, which include Income Tax
 There is also Corporation Tax, Stamp Duties
and all other forms of Tax available

5.  A deficit is where spending is above the total
revenue.
 The opposite to this is a Surplus.
 At the moment we have a budget deficit and
this is financed through borrowing adding to
our national debt

6.  If Demand Pill inflation is existence then a
government would look to reduce Aggregate
Demand
 This is called a deflationary fiscal policy
 This is done by using tax rises which will shift
the AD Curve to the Left

7. AD1

8.  Reflationary Policies can be used to reduce
Unemployment
 Cutting Taxes or raising spending will help
with this
 If a government cut taxes people have more
disposable income so therefore spend more
which increased Consumption and then AD.
 This would shift the curve to the right
 However prices would rise

9. AD1

10.  Short Run
◦ If there is unemployed resources, output can be
increased until all resources are fully employed
 Long Run
◦ In order to have Long Run Growth AS needs to be
increased by investing in Education and Health

11.  Two Options
 Expenditure Reducing
◦ Cutting Govt. Spending and raising taxes to reduce
AD. This reduced imports which will improve the
trade balance
 Expenditure Switching
◦ This encourages INDIAN consumers to switch from
Imports to domestic products through tariffs on
foreign goods
◦ Govt. spends on encouraging INDIA Exports

12.  Can have a significant impact on the Economy
 Can be discriminating which allows different
regions or consumption habits to prosper
 Makes the distribution of income fairer
through progressive taxes and benefits

13.  Can have effects on other areas which were
not originally intended
◦ E.g. Fall in taxes may hope to boost consumption
but end up with consumers sucking in Imports
 Time Lag is huge on Fiscal Policy
 Some policy e.g. High Taxes may be a
disincentive to work