Figure 34-5.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 34-5.Suppose the multiplier is 3 and the government increases its purchases by $25 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.Finally,assume the horizontal distance between the curves AD₁ and AD₃ is $30 billion.The extent of crowding out,for any particular level of the price level,is

Question

Figure 34-5.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 34-5.Suppose the multiplier is 3 and the government increases its purchases by $25 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.Finally,assume the horizontal distance between the curves AD₁ and AD₃ is $30 billion.The extent of crowding out,for any particular level of the price level,is

Quizplus · Accepted Answer

The extent of crowding out is equal to the horizontal distance between the two AD curves, which is $30 billion. Since the government spending increased by $25 billion, the remaining $5 billion was crowded out by a decrease in private investment. Therefore, the extent of crowding out is $30 billion - $25 billion = $5 billion.