What measures could the government take to boost aggregate demand?

The government could use monetary policy, which is the government’s use of interest rates and other monetary tools to control the money supply. For example, the government could lower interest rates. This would encourage people to spend rather than save because the reward for saving decreases as the interest rate decreases. This, in turn would boost consumption and, as consumption is a component of aggregate demand (AD=C+I+G+(X-M)), aggregate demand will also increase. However, one can only lower interest rates so far. At the moment, interest rates are already close to 0 therefore and decrease in the interest rate would likely have little effect. The government could alternatively use fiscal policy. Fiscal policy is the government’s use of taxation, spending and its budgetary position to influence aggregate demand in the economy. In order to boost aggregate demand, the government could increase spending in the economy. As government spending is a component of aggregate demand (AD=C+I+G+(X-M) aggregate demand will shift to the right. Furthermore, aggregate demand will be increased further with the multiplier effect. The multiplier effect occurs when an increase in one component of aggregate demand causes and even greater increase in aggregate demand. However, this depends on the size of the multiplier. If the multiplier is small then the extra boost to aggregate demand will not be significant.