Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change smaller than would otherwise be the case?
A) the multiplier effect
B) the crowding-out effect
C) expansionary monetary policy
D) None of the above is correct.

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when an increase in government spending or a decrease in taxes leads to an increase in the demand for loanable funds, which in turn increases interest rates. Higher interest rates can reduce private investment spending and consumption, which can partially offset the initial increase in aggregate demand from the tax change. Therefore, the crowding-out effect tends to make the size of a shift in aggregate demand resulting from a tax change smaller than would otherwise be the case.

Which of the Following Tends to Make the Size of a Shift