Which of the following helps explain how the multiplier and crowding-out effect impact the size of the shift in aggregate demand from a tax change.
A)Tax cuts stimulate consumer spending, earnings and profits rise, which further stimulates consumer spending-the multiplier effect.
B)The higher income leads to an increase in the demand for money, which tends to lead to higher interest rates.
C)The higher interest rates make borrowing more costly and reduce investment spending-the crowding-out effect.
D)All of the above

Question

Which of the following helps explain how the multiplier and crowding-out effect impact the size of the shift in aggregate demand from a tax change.
A)​Tax cuts stimulate consumer spending, earnings and profits rise, which further stimulates consumer spending-the multiplier effect.
B)​The higher income leads to an increase in the demand for money, which tends to lead to higher interest rates.
C)​The higher interest rates make borrowing more costly and reduce investment spending-the crowding-out effect.
D)​All of the above

Quizplus · Accepted Answer

All of the given options explain the impact of the multiplier and crowding-out effect on the size of the shift in aggregate demand from a tax change. Tax cuts can stimulate consumer spending, which leads to a multiplier effect, increasing earnings and profits and further stimulating consumer spending (Option A). However, the higher income can also lead to an increase in the demand for money, ultimately leading to higher interest rates (Option B). Higher interest rates can, in turn, lead to a reduction in investment spending, the crowding-out effect (Option C).

Which of the Following Helps Explain How the Multiplier and Crowding-Out