Imagine that the government increases its spending by $75 billion.Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?
A)both the multiplier effect and the crowding-out effect
B)the multiplier effect,but not the crowding-out effect
C)the crowding-out effect,but not the multiplier effect
D)neither the crowding out effect nor the multiplier effect

Question

Quizplus · Accepted Answer

Both the multiplier effect and the crowding-out effect can impact the change in aggregate demand, so it is likely that the actual impact would be different from the initial $75 billion increase in government spending. The multiplier effect would amplify the initial increase in spending, while the crowding-out effect would reduce the impact by decreasing private investment in response to increased government borrowing. Therefore, both of these factors could make the change in aggregate demand different from the initial $75 billion increase.

Imagine That the Government Increases Its Spending by $75 Billion