The change in aggregate demand that results from fiscal expansion changing the interest rate is called the
A)multiplier effect.
B)crowding-out effect.
C)accelerator effect.
D)Ricardian equivalence effect.

Question

Quizplus · Accepted Answer

The change in interest rates resulting from fiscal expansion leads to a reduction in private investment, which, in turn, reduces the effect of fiscal expansion on aggregate demand. This reduction in aggregate demand resulting from the reduction of private investment is known as the crowding-out effect. The multiplier effect refers to the impact of an initial change in spending on economic activity, the accelerator effect describes the relationship between the rate of change in investment and the rate of change in aggregate demand, and Ricardian equivalence suggests that changes in government expenditure financed by borrowing have no impact on aggregate demand.

The Change in Aggregate Demand That Results from Fiscal Expansion