Figure 34-6. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs.

-Refer to Figure 34-6. Suppose the graphs are drawn to show the effects of an increase in government purchases. If it were not for the increase in r from r1 to r2, then
A) there would be no crowding out.
B) the full multiplier effect of the increase in government purchases would be realized.
C) the AD curves that actually apply, before and after the change in government purchases, would be separated horizontally by the distance equal to the multiplier times the change in government purchases.
D) All of the above are correct.

Question

Figure 34-6. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs.
 
-Refer to Figure 34-6. Suppose the graphs are drawn to show the effects of an increase in government purchases. If it were not for the increase in r from r1 to r2, then
A) there would be no crowding out. 
B) the full multiplier effect of the increase in government purchases would be realized. 
C) the AD curves that actually apply, before and after the change in government purchases, would be separated horizontally by the distance equal to the multiplier times the change in government purchases. 
D) All of the above are correct.

Quizplus · Accepted Answer

The increase in interest rates (r from r1 to r2) leads to crowding out, which reduces the full multiplier effect. If the interest rate did not increase, there would be no crowding out, and the full multiplier effect would be realized, causing the AD curves to shift by the full multiplier times the change in government purchases.