Consider how the government's fiscal policy response affects aggregate demand (AD).
The AD curve shows how many final goods and services are bought as a function of the average price level. Both individual consumers' purchases and government purchases are included in aggregate demand.
The federal government is now devoting a massive amount of spending to aid and reconstruction. Some of this aid takes the form of direct government purchases of goods and services, like the fees paid to transportation companies and hospitals to take care of victims. Some of the aid, like the $2,000 debit cards given to some displaced families, takes the form of direct transfers to citizens.
Show the effect of the increase in government spending on the AD curve in the diagram.