If a government finances an increase in its expenditures by selling bonds to the public, then the aggregate demand curve will:
A)not shift.
B)shift out - but not as much as it would if crowding out didn't occur.
C)shift out by the same amount regardless of whether crowding out occurs.
D)shift out more if crowding out occurs.

Question

Quizplus · Accepted Answer

When a government finances increased expenditures by selling bonds to the public, it raises interest rates, which can crowd out private investment. This means the aggregate demand curve shifts out, but not as much as it would if crowding out did not occur, because some of the increase in demand from government spending is offset by a decrease in private spending.

If a Government Finances an Increase in Its Expenditures by Selling