Figure 11-2
-Assume the economy was at E in Figure 11-2 and the government increased spending.If the aggregate demand curve initially shifted to A D₂,but then fell back to AD₃,then we know that

Question

Figure 11-2 
-Assume the economy was at E in Figure 11-2 and the government increased spending.If the aggregate demand curve initially shifted to A D₂,but then fell back to AD₃,then we know that

Quizplus · Accepted Answer

When the aggregate demand curve initially shifts to AD₂, it indicates that the government's increase in spending has stimulated the economy, causing an increase in planned private investment spending. However, when the aggregate demand falls back to AD₃, it implies that there has been crowding out of planned private investment spending. This is because, as aggregate demand shifts to the right due to increased government spending, interest rates rise, making it more expensive for firms to borrow money for investment. Consequently, some firms may be discouraged from investing, leading to a decrease in planned private investment spending, and causing the aggregate demand to fall back to AD₃. Therefore, the correct answer is C.

Figure 11-2 -Assume the Economy Was at E in Figure 11-2 and Figure