Fiscal policy involves government actions to influence the economy through changes in government spending and taxation. The other tools listed are part of monetary policy, managed by the central bank.
Higher taxes reduce consumers' disposable income, leading to decreased consumption and investment, which shifts the aggregate demand curve to the left.
When the central bank buys government securities, it injects money into the economy, lowering interest rates and encouraging borrowing and spending, which are goals of expansionary monetary policy.
Keynesians argue that during a recession, active government intervention is needed to stimulate demand. Increased spending and tax cuts boost aggregate demand and help reduce unemployment.
Contractionary fiscal policy, such as reducing government spending or increasing taxes, aims to decrease aggregate demand to control inflationary pressures in the economy.
