Figure 21-6. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs.
-Refer to Figure 21-6. Suppose the multiplier is 5 and the government increases its purchases by $10 billion. Also, suppose the AD curve would shift from AD₁ to AD₂ if there were no crowding out; the AD curve actually shifts from AD₁ to AD₃ with crowding out. Also, suppose the horizontal distance between the curves AD₁ and AD₃ is $20 billion. The extent of crowding out, for any particular level of the price level, is

Question

Figure 21-6. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs.

-Refer to Figure 21-6. Suppose the multiplier is 5 and the government increases its purchases by $10 billion. Also, suppose the AD curve would shift from AD₁ to AD₂ if there were no crowding out; the AD curve actually shifts from AD₁ to AD₃ with crowding out. Also, suppose the horizontal distance between the curves AD₁ and AD₃ is $20 billion. The extent of crowding out, for any particular level of the price level, is

Quizplus · Accepted Answer

The initial increase in government purchases of $10 billion with a multiplier of 5 would shift the AD curve by $50 billion without crowding out. Since the actual shift is $20 billion, the extent of crowding out is $50 billion - $20 billion = $30 billion.