Assuming that the crowding-out effect is $100 billion and the multiplier effect of an increase in government purchases is $120 billion, then the total effect on aggregate demand will be:
A)an $80 billion increase
B)an $80 billion decrease
C)a $20 billion increase
D)a $20 billion decrease

Question

Quizplus · Accepted Answer

The total effect on aggregate demand will be the sum of the crowding-out effect and the multiplier effect. 
Total effect = crowding-out effect + multiplier effect
Total effect = $100 billion + $120 billion
Total effect = $220 billion
Since the multiplier effect is larger than the crowding-out effect, the total effect will be a net increase in aggregate demand of $220 billion. Thus, the best choice is option C (a $20 billion increase).

Assuming That the Crowding-Out Effect Is $100 Billion and the Multiplier