According to Keynesian economics, when the government changes the levels of taxation and

governments spending, it influenced aggregate demand and the level of economic activity. Here, how
does lowering taxes ang government spending create economic growth? If people are paying less in
taxes, they have more money to spend or invest. Increase consumers spending or investment could
improve economic growth. The government might decide to increase its own spending. For instance, by
building more roads, hi-ways, bridges or even other necessary things particularly marketing the
agricultural products of the farmers. The idea is that the additional government spending creates jobs
and lowers the unemployment rate. That’s how a government spend and now creates a economic
growth.

Both fiscal policy and monetary policy can impact aggregate demand because they can influence the
factors used to calculate it: consumer spending on goods and services, investment spending on business
capital goods, government spending on public goods and services, exports, and imports. Fiscal policy
affects aggregate demand through changes in government spending and taxation. Those factors
influence employment and household income, which then impact consumer spending and investment.

Monetary policy impacts the money supply in an economy, which influences interest rates and the
inflation rate. It also impacts business expansion, net exports, employment, the cost of debt, and the
relative cost of consumption versus saving—all of which directly or indirectly impact aggregate demand.

Fiscal policy impacts government spending and tax policy, while monetary policy influences the money
supply, interest rates, and inflation.

Intends to decrease the level of liquidity/money supply in the economy and which could also result in a
relatively lower inflation path for the economy. Contractionary monetary policy helps slow down the
economy or it slows down the economic growth. We could apply here the tight money policy where the
problem is inflation. Tight money policy it will now tends to higher interest rate. Increased foreign
demand for dollars therefore the value of dollar will now appreciates. Net exports decrease then
aggregate demand decreases, strengthening the tight money policy.

Expansionary because it intends to increase the level of liquidity/money supply in the economy and
which could result in a relatively higher inflation path for the economy. The main objective of
expansionary policy is to speed up the economy or increase economic growth
Under the monetary policy and equilibrium GDP, if the real rate of interest decreases, for example the
money supply 1,2, and 3 it now intend to increase and that is now the implication. Now, if the real
interest rate it will still what we call decrease then the investment demand it will also intend to increase.
In conclusion, if the money supply increases to stimulate the economy the interest rate would
decreases. Investment increases therefore Aggregate Demand and GDP increases with slight inflation