Question

what effects does discretionary spending policy have on the aggregate economy?

Answer 1

There are two types of discretionary spending policies-

1) Contractionary discretionary government spending- When the economy's actual output is greater than the potential output, the economy's growth is out of control then the government needs to decrease spending. this policy shifts the aggregate demand to the left. As a result of the economy's output decrease and inflation increases.

2) Expansionary discretionary government spending- When the economy's growth is sluggish that is actual output is less than the potential output, the government needs to increase government spending. This policy shifts the aggregate demand to the right. as a result economy's output increases and inflation decreases.