If the economy is on the steep portion of the AS curve and government spending increases, ________ crowds out ________.
A) consumption; planned investment
B) government spending; planned investment
C) planned investment; consumption
D) planned investment; government spending

Question

Quizplus · Accepted Answer

When the economy is on the steep portion of the AS curve, any increase in government spending will lead to a smaller increase in real output and a larger increase in the price level. This is because the economy is already close to full employment, so any increase in aggregate demand will primarily lead to higher prices instead of higher output. The increase in government spending will compete with planned investment for resources such as labor and materials, leading to higher costs for planned investment and a decrease in the quantity of planned investment. Therefore, government spending crowds out planned investment in this scenario.

If the Economy Is on the Steep Portion of the AS Curve