-Refer to the above diagrams.Suppose that government undertakes fiscal policy designed to increase aggregate demand from AD₁ to AD₂ and thereby to increase GDP from X to Z.In terms of graph B,which of the following might explain why GDP increases to Y rather than to Z?

Question

-Refer to the above diagrams.Suppose that government undertakes fiscal policy designed to increase aggregate demand from AD<sub>1</sub> to AD<sub>2</sub> and thereby to increase GDP from X to Z.In terms of graph B,which of the following might explain why GDP increases to Y rather than to Z? A) depreciation of the dollar. B) reduction in tariffs imposed by our trading partners. C) decrease in the saving schedule. D) crowding-out effect.

Quizplus · Accepted Answer

The crowding-out effect explains why GDP might increase to Y instead of Z when the government undertakes fiscal policy to boost aggregate demand. This effect occurs when increased government spending leads to higher interest rates, which in turn reduces investment spending by businesses and households, partially offsetting the initial increase in aggregate demand.

-Refer to the Above Diagrams