Assuming the crowding-out effect but no multiplier or investment-accelerator effects, what is the effect of a $600 billion increase in government expenditures on the aggregate demand or supply?
A) It shifts the aggregate demand right by more than $600 billion.
B) It shifts the aggregate demand right by less than $600 billion.
C) It shifts the aggregate supply left by more than $600 billion.
D) It shifts the aggregate supply left by less than $600 billion.

Question

Quizplus · Accepted Answer

According to the crowding-out effect, an increase in government expenditures will lead to a decrease in private spending, which will partly offset the initial increase in aggregate demand. Therefore, the shift in aggregate demand will be less than $600 billion.

Assuming the Crowding-Out Effect but No Multiplier or Investment-Accelerator Effects