How does fiscal policy change the composition of aggregate demand?
Answer:
aggregate demand is composed of the following factors:
consumption plus investment plus government spending plus exports minus imports. so what your question is essentially asking is how these elements are affected. depending on whether or not you pursue and expansionary or a contractionary fiscal policy your demand will be affected in a different way.
expansionary: the government increases spending and reduces taxation which means people have more room to consume and invest while government spending rises by definition. however imports are increased because people will now demand more and since the local market wont be able to spontaneously produce that much imports will have to increase.
contractionary. government reduces spending and increases taxation so by definition government spending is reduced while consumption and investment are disincentivised. however because demand is reduced people will no longer need imports to cover their needs and there will be local produce free for exporting thus increasing exports while reducing imports.
for more on fiscal policy try:
http://www.econessays.com/page14.htm...
http://www.econessays.com/macro.htm...
This will be a simple explanation:
Depending on the fiscal policy change, is to increase the cost of money, devalue the currency, tight money supply policy...then aggregate demand for goods and services will decrease due to a limited source of funding. For loose money supply, aggregate demand may increase due to cheap source of funding.
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