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The government can use an expansionary fiscal policy in the form of an increase in government spending to increase the level of aggregate demand in the economy.
How can the government increase aggregate demand?
Some typical ways fiscal policy is used to increase aggregate demand include tax cuts, military spending, job programs, and government rebates.
In contrast, monetary policy uses interest rates as its mechanism to reach its goals.
How do you increase aggregate supply?
In the short run, aggregate supply responds to higher demand (and prices) by increasing the use of current inputs in the production process.
In the short run, the level of capital is fixed, and a company cannot, for example, erect a new factory or introduce a new technology to increase production efficiency.
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