Figure 24-6.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 24-6.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 24-6.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 24-6.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 extent of crowding out is the difference between the shift in AD with and without crowding out, which is $20 billion. Therefore, the extent of crowding out is $20 billion. Since the government increases its purchases by $10 billion, the remaining $10 billion must be crowded out, leading to a total crowding out of $10 billion + $20 billion = $30 billion. Option A is incorrect because it refers to the horizontal distance between the curves on the left-hand graph, which is not relevant to the extent of crowding out. Option B is incorrect because it represents the total shift in AD with crowding out, not just the extent of crowding out.