Assume a multiplier effect,some crowding out and no accelerator effect An increase in government expenditures changes aggregate demand more
A)the smaller the MPC and the farther an increase in income shifts money demand.
B)the smaller the MPC and the less an increase in income shifts money demand.
C)the larger the MPC and the farther an increase in income shifts money demand.
D)the larger the MPC and the less an increase in income shifts money demand.

Question

Quizplus · Accepted Answer

With a larger MPC, a given increase in government expenditures will lead to a larger increase in aggregate demand as there will be a greater propensity for consumers to spend the extra income. However, the multiplier effect will be partially offset by crowding out, which occurs when increased government spending leads to a higher interest rate, thereby reducing private investment spending. Since there is no accelerator effect, the increase in government expenditures will not lead to an increase in investment spending, which further reduces the multiplier effect. As a result, the overall increase in aggregate demand will be relatively small, and the shift in money demand will be less pronounced.

Assume a Multiplier Effect,some Crowding Out and No Accelerator Effect