Fiscal and monetary policy
Multipliers, lags, and when each tool fits.
Fiscal policy
Government spending G and taxes T shift AD. Expansionary fiscal policy (↑G or ↓T) raises AD; contractionary does the opposite. Automatic stabilizers (progressive taxes, unemployment benefits) dampen cycles without new legislation.
Watch crowding out: higher G may raise interest rates and reduce private I when the economy is near capacity.
Monetary policy
Central banks move policy rates and liquidity. Lower rates stimulate C and I; higher rates cool inflation. Transmission runs through bank lending, asset prices, exchange rates, and expectations.
Policy mix
During supply shocks, monetary tightening may be needed even if output falls. Fiscal support for vulnerable groups can be targeted without ignoring inflation risk.
Essay structure: gap → tool → channel → lag → risk.