The reduction in aggregate demand brought about by such actions leads firms to produce fewer products, slows hiring, and reduces inflationary pressure. For the same reason he calls for tax increases in inflationary times, to reduce consumers' disposable income. In order to slow down the economy, Keynes calls for Congress to reduce government spending in order to reduce pressure on aggregate demand. Keynes advocates the opposite positions during times of rapid inflation. Through both methods of fiscal policy, the increase in aggregate demand stimulates firms to increase production, hire workers, and increase household incomes to enable them to buy more. At the same time, he recommends, Congress should decrease taxes in order to give households more disposable income with which they can buy more products. Keynes recommends that, during periods of recession, Congress should increase government spending in order to вЂњprime the pumpвЂќ of the economy. Read the brief explanation of fiscal policy under the вЂњKeynesian SchoolвЂќ heading at the Federal Reserve Bank of San Francisco website. He advocated that government take an active role in resolving economic issues through the use of two policies: fiscal policy and monetary policy.ДЇiscal policy is the use of government spending and taxes to stabilize the economy. As John Maynard Keynes argued in his 1936 book General Theory of Employment, Interest, and Money, nations need not wait for potential economic problems to correct themselves. However, our economy generally follows an economic cycle of recession and expansion every few years. However, if the money supply is too large, excessive consumer demand can push up the aggregate demand, raising real output and prices and possibly pushing the country into serious inflation.Д®conomists generally look to annual goals of GDP growth of 2.5-3 percent, an inflation rate of 3-4 percent, and an unemployment rate of approximately 5 percent for stable economic growth. If consumer confidence in the economy falls and people reduce their spending, aggregate demand can fall, reducing real output and prices and possibly dropping the country into a recession. Shifts in the aggregate supply and aggregate demand curves can illustrate changes in the performance of our economy. Aggregate supply and demand are shown in the graph below. It is downward-sloping because at higher prices, consumers, firms, government, and foreign customers are less willing to buy, while they will likely buy more at lower prices. Aggregate demand is the total demand for goods and services in the nationвЂ™s economy. It is upward-sloping because at higher prices firms have an incentive to produce more, and at lower prices they are likely to produce less. Aggregate supply is the total supply of goods and services produced in the nationвЂ™s economy. Self Check Activity: Students can analyze economic problems to determine how fiscal and monetary policies should be used to correct economic problems in this activity.Д®conomic performance can be illustrated through the concepts of aggregate supply and aggregate demand.Federal Reserve Release Press Release: This Federal Reserve web site explains how the Federal Reserve used monetary policy to help resolve the 2001 recession.Federal Reserve Bank of Boston Speeches: Asset Bubbles and Systemic Risk: This website provides information on monetary policy during the 2001 recession and the results of the government action that was implemented.Federal Reserve Bank of San Francisco: This web site of the Federal Reserve Bank of San Francisco describes the three tools of monetary policy.Major Schools of Economic Theory: This web site of the Federal Reserve Bank of San Francisco describes major economic theories and the two tools of fiscal policy.

Interactive inflation