Introduction to Finance

aggregate demand 
total demand 
for fi nal goods and services in the 
economy at a point in time
automatic stabilizers 
continuing 
federal programs that stabilize 
economic activity
transfer payments 
government 
payments for which no current 
services are given in return

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C H A PT E R 5 Policy Makers and the Money Supply
The secondary eff ects of spending that result from a tax cut or from increased govern-
ment spending depend on how and what proportion the recipients spend. To the extent that 
they spend it on current consumption, aggregate demand is further increased in the short run. 
The goods on which recipients spend the income determine the sectors of the economy that 
receive a boost. If they invest the added income and later use it to purchase capital goods, 
spending is also increased. In this case, however, there is a time lag, and diff erent sectors of 
the economy are aff ected. If the money is saved, thus added to idle funds available for invest-
ment, there is no secondary eff ect on spending.
The eff ects must also be considered if economic activity is to be restrained by a decrease 
in government spending or by a tax increase. A decrease in spending by the government will 
cut consumer spending by at least that amount; the secondary eff ects may cut it further. A tax 
increase may not cut spending by a like amount, since some taxpayers may maintain their level 
of spending by reducing current saving or by using accrued savings. A tax increase could, 
however, cut total spending more if it should happen to discourage specifi c types of spending, 
such as on home building or on credit purchases of consumer durable goods. This could lead to 
a spending cut that is substantially greater than the amount of money taken by the higher taxes.