The government of Japan has tried hard to stimulate the economy by aggressively pursuing Quantitative Easing. It was the first country to allow its central bank to purchase massive quantities of government bonds.
By doing so, its target was to positively influence the money supply by buying bonds, thus give commercial banks cash, which in turn, banks can provide loans to businesses, shift the demand curve to the right, thus increasing GDP, lower unemployment. Despite these efforts, which did not turn out as expected, the government is now shifting from monetary policy to fiscal policy, by increasing government spending.
What we observe in the above graph is a shift in the new demand curve from AD1 to AD2. This effect as a result of a fiscal policy, will in turn give rise to a new equilibrium, Y2, from Y1, which will increase GDP. But government spending runs the risk of an increase in inflation, from P1 to P2.
What the government is trying to do with is expansive fiscal and monetary policies, is to get the economy out of a recession, running deficits, and bring the economy to potential, and create surpluses, and promote employment.
Prime Minister Abe announced that Japan will increase social programs, the so called transfer payments, and raise the minimum wage.
