Explain what types of policies the federal government may have implemented to restore aggregate demand and the potential obstacles policymakers may have encountered.

Aggregate demand refers to the total demand for goods and services in an economy, which is the sum of consumption, investment, government purchases, and net exports (exports minus imports). When aggregate demand falls, it leads to economic downturns (recession, low employment, and low output) and when aggregate demand increases, it leads to economic growth (expansion, high employment, and high output).

Fiscal policy is one of the main tools used by the federal government to influence aggregate demand. It involves the use of government spending, taxation, and transfer payments to affect the economy. There are two types of fiscal policy: expansionary fiscal policy and contractionary fiscal policy. In this case, we're discussing how the federal government can restore aggregate demand, so we'll focus on expansionary fiscal policy.

Expansionary fiscal policy includes: 1. Increasing government spending: The government can spend more on public infrastructure, healthcare, education, or defense to boost aggregate demand. 2. Decreasing taxes: The government can cut taxes for individuals and firms, which increases disposable income and encourages consumption and investment. 3. Increasing transfer payments: The government can increase welfare payments, unemployment benefits, and social security payments, which can help raise consumption by putting more money into the hands of consumers.

Monetary policy is another tool used by the federal government (central bank) to influence aggregate demand. It involves the manipulation of interest rates, money supply, and credit availability to stimulate or slow down economic activity. In this case, we will focus on expansionary monetary policy.

Expansionary monetary policy includes: 1. Lowering interest rates: The central bank can lower interest rates to stimulate borrowing and investment, as well as encourage consumer spending, thus increasing aggregate demand. 2. Quantitative easing: The central bank can increase the money supply by buying government bonds or other financial assets in the market, which can lead to lower interest rates and increased lending. 3. Credit easing: The central bank can provide banks and other financial institutions with funds to encourage lending to consumers and businesses.

Policymakers may encounter several obstacles when implementing these policies: 1. Ineffectiveness at the zero lower bound: When interest rates are close to zero, traditional expansionary monetary policy becomes less effective, as there is little room to lower interest rates further. 2. Long implementation lags: Fiscal policy changes can take time to pass through the legislative process and may not provide immediate relief during economic downturns. 3. Public debt concerns: Expansionary fiscal policy can increase public debt, leading to concerns about sustainability and potential future tax increases or spending cuts. 4. Inflation and exchange rate risks: Both expansionary fiscal and monetary policies can lead to rising inflation and depreciation of the currency, which may cause concerns for policymakers. 5. Political considerations: Policymakers may face political opposition or be influenced by different ideologies, making it challenging to implement the required policies smoothly and in a timely manner.