When the crowding-out effect of an increase in government purchases is included in the analysis,what is the effect on AD?

Question

Quizplus · Accepted Answer

The crowding-out effect suggests that increased government spending may lead to higher interest rates, which can reduce private investment. This means the increase in aggregate demand (AD) is less than what the simple multiplier would predict, as some private spending is offset by the higher interest rates.

When the Crowding-Out Effect of an Increase in Government Purchases