Assume the multiplier is 5 and that the crowding-out effect is $30 billion.An increase in government purchases of $20 billion will shift the aggregate-demand curve to the
A)right by $130 billion.
B)right by $70 billion.
C)right by $50 billion.
D)right by $10 billion.

Question

Quizplus · Accepted Answer

The formula for calculating the total impact of an increase in government spending is:
Total Impact = Initial Increase in Spending x Multiplier
Total Impact = $20 billion x 5
Total Impact = $100 billion
However, we have to account for the crowding-out effect of $30 billion. Therefore, the net increase in aggregate demand is $70 billion ($100 billion - $30 billion). Therefore, the correct answer is B, which represents a rightward shift in the aggregate-demand curve by $70 billion.

Assume the Multiplier Is 5 and That the Crowding-Out Effect