How fiscal policies work? A key feature in AD/AS model is that economy can deviate from its potential output in the short run and eventually it will move comparable to this level. The Potential GDP/output is the maximum level of output a economy can produce given the existing resources and technology. Keynesian model assumes two types of policies to shift the AD/AS curves; namely, demand management policies and supply management policies. Both of these policies can be either monetary policies or fiscal policies.

Explain these demand management policies and how they shift the AD curve? Also explain these demand management policies and how they shift the AS curve? Don't forget to discuss the outcome in the economy.

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Demand management policies refer to measures undertaken by governments primarily aimed at influencing aggregate demand AD to stabilize the economy pro... View the full answer