-Refer to the above figure. If the economy is at E and the government wants to increase aggregate demand to AD₃, but the increase in spending only shifts the aggregate demand curve to AD₂, then
A)complete crowding out has occurred.
B)some crowding out has occurred.
C)the increased borrowing caused interest rates to fall.
D)the short-run aggregate supply curve is steeper than the figure indicates.

Question

-Refer to the above figure. If the economy is at E and the government wants to increase aggregate demand to AD₃, but the increase in spending only shifts the aggregate demand curve to AD₂, then
A)complete crowding out has occurred. 
B)some crowding out has occurred. 
C)the increased borrowing caused interest rates to fall. 
D)the short-run aggregate supply curve is steeper than the figure indicates.

Quizplus · Accepted Answer

Some crowding out has occurred because the government's increase in spending did not fully achieve the desired shift to AD₃, indicating that some of the increase in aggregate demand was offset by a reduction in private sector spending.

-Refer to the Above Figure