Public policies essentially influence the Confidence in consumers, both in booms and recessions. If the AD curve shifts to the left, for example, The Fed can increase the money supply and lower interest rates to push the AD curve back to the right. In the case of an overheating economy, The Fed can contract the money supply, which raises interest rate and shifts the AD curve to the left.
Fiscal policy can also influence the AD curve in the short run. While in monetary policy, the Fed indirectly influences spending decisions of consumers, the government changing its own purchases of goods and services affects the AD curve directly under fiscal policy.
Policies can be very effective in achieving economic stability, however the crowding out effect tells us that government spending could have a negative unwanted effect on the AD curve by putting downward pressure on it via higher interest rates.
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