Which of the following tends to make the size of a shift in aggregate demand resulting from a tax cut smaller than it otherwise would be?
A)the multiplier effect
B)the crowding-out effect
C)the accelerator effect
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The crowding-out effect tends to reduce the size of the shift in aggregate demand resulting from a tax cut. This occurs because the increased government borrowing associated with the tax cut may lead to higher interest rates and less private sector investment, offsetting some of the potential expansionary effects of the tax cut. The multiplier effect and accelerator effect both tend to amplify the size of shifts in aggregate demand, and thus do not fit the given question prompt.

Which of the Following Tends to Make the Size of a Shift