Effects of Fiscal Policy in a Closed Economy: A Dynamic AD-AS Framework Analysis
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Abstract
This study examines the effects of fiscal policies on economic indicators through an aggregate demand–aggregate supply (AD-AS) model in a closed economy. Using numerical methods, we analyze the immediate impacts of policy changes and establish conditions for economic model stability. The research focuses on three primary fiscal policy instruments: government spending, consumption tax, and investment tax. We evaluate their influence on national income through numerical simulations to provide quantitative support for policy recommendations. Our findings reveal a positive correlation between government spending and national income, highlighting public expenditure's potential role in stimulating economic growth. Conversely, the results demonstrate negative effects from increased taxation, as higher consumption and investment taxes contribute to declining national income. This inverse relationship suggests that elevated tax rates may impede economic vitality. Based on our numerical analysis, we propose strategic fiscal interventions to promote economic growth: increasing government spending can effectively enhance economic output by injecting resources and boosting aggregate demand, while reducing tax rates can decrease the burden on consumers and investors, thereby encouraging economic activity. The results also emphasize that fiscal expansion is most effective when inflationary pressures remain moderate, ensuring that growth does not come at the expense of macroeconomic stability. This study contributes to fiscal policy modeling by integrating stability analysis into AD-AS simulations and offers insights for policymakers balancing growth and inflation risks.
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