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This would then increase the GDP level (yp). Similarly, a reduction tax would also increase AD, shifting the AD curve to the right. The increase would also result in an increase in the GDP level.
Diagram XXX Adapted from (Sullivan and Sheffrin, 2006)
On the contrary, contractionary fiscal policy aims to stabilize the economy during a boom, when there is excessive economic growth, leading to "overheating". (Sullivan and Sheffrin, 2006) The government would decrease government expenditure or increase tax rates to decrease the aggregate demand. When there is a decrease in government expenditure, AD would decrease thus shifting the AD curve to the left (AD1), causing a decrease in overall GDP level (yp)...
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