What type of changes does fiscal policy involve to affect aggregate demand?

Fiscal policy specifically involves changes in government spending and taxation to influence aggregate demand within an economy. When the government increases spending, it puts more money into the economy, which can boost consumption and investment as businesses and consumers respond to the increased demand for goods and services. Conversely, if the government decides to reduce taxes, it increases households' disposable income, which also contributes to higher consumption and, subsequently, aggregate demand.

This mechanism is crucial during periods of economic fluctuation—such as recessions—where increased government spending or tax cuts can stimulate economic activity, possibly leading to job creation and improved overall economic performance. This direct manipulation of fiscal levers ensures that government actions can significantly impact the broader economic landscape, making it a central tool in macroeconomic policy.

Other options, while relevant to the economy, do not capture the direct influence of fiscal policy on aggregate demand. Changes in interest rates relate more closely to monetary policy, adjustments in external trade agreements deal with trade balance and have longer-term implications rather than immediate effects, and shifts in global economic conditions can certainly impact national economic performance but are not a direct result of fiscal policy decisions.