Suppose there are both multiplier and crowding out effects but without any accelerator effects. An increase in government expenditures would
A)always shift aggregate demand right by a larger amount than the increase in government expenditures.
B)always shift aggregate demand right by the same amount as the increase in government expenditures.
C)always shift aggregate demand right by a smaller amount than the increase in government expenditures.
D)shift aggregate demand right by a larger, equal, or smaller amount than the increase in government expenditures.

Question

Quizplus · Accepted Answer

The presence of both multiplier and crowding out effects means that the net impact on aggregate demand could vary. The multiplier effect tends to increase aggregate demand more than the initial government expenditure, while the crowding out effect reduces this impact by increasing interest rates and decreasing investment. Without the accelerator effect, the final impact on aggregate demand could be larger, equal, or smaller than the initial increase in government expenditures, depending on the relative strengths of the multiplier and crowding out effects.

Suppose There Are Both Multiplier and Crowding Out Effects but Without