... level of national income and output. A change in indirect taxation will have an immediate effect on aggregate demand because goods will be cheaper and therefore consumers will respond by buying of more of the good or increasing consumption patterns due to their relative increase income. Fiscal policy can also affect the economy in times of slump or severe recession. Keynesians believe that in a recession we expect to see a rise in government spending and a cut in tax revenue. The increase in government spending and decrease in tax revenue due to the increase use of social security benefits are described as automatic stabilisers and help to reduce the severity of a recession or slump. If the government reflates AD by reducing taxation, or by increasing government spending, then this may lead to a budget deficit. To finance the deficit the government will have to sell debt to the private ...

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