Imagine that the government increases its spending by $20 billion.Which of the following by itself would tend to make the change in aggregate demand different from $20 billion?
A) both the multiplier effect and the crowding-out effect
B) the multiplier effect,but not the crowding-out effect
C) the crowding-out effect,but not the multiplier effect
D) neither the crowding out effect nor the multiplier effect

Question

Quizplus · Accepted Answer

The multiplier effect would tend to amplify the initial increase in government spending, resulting in a larger increase in aggregate demand than just $20 billion. However, the crowding-out effect would tend to offset this increase by reducing private investment due to higher interest rates, resulting in a smaller increase in aggregate demand than $20 billion. Therefore, both effects together would make the change in aggregate demand different from $20 billion.

Imagine That the Government Increases Its Spending by $20 Billion