When the crowding-out effect of an increase in government purchases is included in the analysis:
A)AD shifts left, but by more than the simple multiplier analysis would imply.
B)AD shifts left, but by less than the simple multiplier analysis would imply.
C)AD shifts right, but by more than the simple multiplier analysis would imply.
D)AD shifts right, but by less than the simple multiplier analysis would imply.

Question

When the crowding-out effect of an increase in government purchases is included in the analysis:
A)​AD shifts left, but by more than the simple multiplier analysis would imply.
B)​AD shifts left, but by less than the simple multiplier analysis would imply.
C)​AD shifts right, but by more than the simple multiplier analysis would imply.
D)​AD shifts right, but by less than the simple multiplier analysis would imply.

Quizplus · Accepted Answer

The crowding-out effect refers to a situation where increased government spending leads to higher interest rates, which in turn reduces investment spending by the private sector. This effect partially offsets the initial increase in aggregate demand (AD) caused by the government's spending. Therefore, while AD still shifts to the right due to the government's increased purchases, the shift is less than what would be predicted by the simple multiplier analysis, which does not account for the crowding-out effect.

When the Crowding-Out Effect of an Increase in Government Purchases