A decrease in government transfers causes a decrease in consumer incomes. Increase in government purchases of police protection services. Federal Reserve decreases the money supply, thereby raising interest rates. There is an increase in tax rates which results in reduced work incentives and work effort by the labor force. There is an increase in tax rates which decreases after-tax consumer incomes.
Government goes to war with another country and increases purchases of military goods.
Explain how the government can use fiscal policy to expand economic activity. Explain how the government can use monetary policy to expand economic activity.