Assuming the crowding-out effect but no multiplier or investment-accelerator effects, what is the effect of a $500 billion increase in government expenditures on the aggregate demand or supply?
A)It shifts the aggregate demand right by more than $500 billion.
B)It shifts the aggregate demand right by less than $500 billion.
C)It shifts the aggregate supply left by more than $500 billion.
D)It shifts the aggregate supply left by less than $500 billion.

Question

Quizplus · Accepted Answer

The crowding-out effect suggests that an increase in government expenditures will lead to a decrease in private investment, which will partially offset the initial increase in aggregate demand. Therefore, the shift in aggregate demand will be less than the initial $500 billion increase in government expenditures.

Assuming the Crowding-Out Effect but No Multiplier or Investment-Accelerator Effects