If crowding out exists, contractionary fiscal policy will cause the aggregate demand curve to shift in by more than indicated by the government spending multiplier.

Question

Quizplus · Accepted Answer

Contractionary fiscal policy reduces government spending, which directly decreases aggregate demand. Crowding out refers to reduced private investment due to increased government borrowing, which is not applicable in contractionary policy.

If Crowding Out Exists, Contractionary Fiscal Policy Will Cause the Aggregate