To influence aggregate demand, fiscal policy primarily utilizes which two tools?

Fiscal policy influences aggregate demand primarily through government spending and taxation. Government spending directly affects demand by injecting money into the economy, leading to increased consumption and investment. For instance, when the government invests in infrastructure projects, it creates jobs and increases disposable income, which boosts overall demand for goods and services.

Taxation plays a crucial role as well. By adjusting tax rates, the government can alter the disposable income of households and businesses. A decrease in taxes leaves individuals and companies with more money to spend, thereby increasing consumption and investment. Conversely, increasing taxes can dampen aggregate demand as it reduces available income for spending.

While other tools like interest rates, regulations, subsidies, and trade agreements can influence the economy, they are primarily associated with monetary policy and other economic strategies rather than the direct mechanisms of fiscal policy focused on managing demand through the government’s budget choices.