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Fiscal policy affects which two parts of aggregate demand directly?

Aggregate demand, as you can see in the link below, is made up of four components.  These components are consumer spending, government purchases, investment, and net exports.  Fiscal policy is made up of two components.  These are government spending and taxes.  I would argue that only one of the components of aggregate demand (government purchases) is directly affected by fiscal policy.  If, however, we have to identify one other component, I would say that it...

Aggregate demand, as you can see in the link below, is made up of four components.  These components are consumer spending, government purchases, investment, and net exports.  Fiscal policy is made up of two components.  These are government spending and taxes.  I would argue that only one of the components of aggregate demand (government purchases) is directly affected by fiscal policy.  If, however, we have to identify one other component, I would say that it is consumer spending.


Clearly, fiscal policy will affect government purchases in a direct way.  When the government engages in fiscal policy, it increases or decreases its spending.  This means, in part, that it makes more purchases or fewer.  For example, the government might pay more companies to build or maintain roads as part of fiscal policy.  When this happens, the government-purchases component of aggregate demand rises as a direct result of the fiscal policy.


I would argue that this is the only component that is directly affected by fiscal policy.  However, you state that you need to identify two components that are affected.  I would argue that the second is consumer spending.  When the government decreases taxes and increases spending, for example, people have more money available to them.  Because of this, they are able to spend more money and consumer spending will rise.  I would argue that this is not really a direct effect because fiscal policy does not directly increase consumer spending.  However, fiscal policy does affect consumer spending fairly directly.  It does so much more directly than it affects business investment or net exports.  For this reason, I would say that government purchases and consumer spending are the two parts of aggregate demand that are directly affected by fiscal policy.

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