Refer to the information provided in Figure 13.2 below to answer the questions that follow. Figure 13.2 -Refer to Figure 13.2.Planned investment would experience the greatest amount of crowding out when the aggregate demand curve shifts from A)AD₁ to AD₂. B)AD₃ to AD₄. C)AD₅ to AD₆. D)The amount of crowding out is the same for all AD curve shifts shown in the figure.

Question

Quizplus · Accepted Answer

As the aggregate demand curve shifts from AD₅ to AD₆, the real interest rate increases from 4% to 6%. This increase in real interest rate leads to an increase in the rate of crowding out, as shown by the larger decrease in investment (from $200 billion to $120 billion) for the same increase in government borrowing (from $100 billion to $140 billion) compared to the other shifts in the AD curve. Therefore, C is the best choice for the greatest amount of crowding out.

Refer to the Information Provided in Figure 13