Question

The multiplier effect of fiscal policy predicts that an increase in government spending of $150 billion will increase total income by $750.00 billion if the marginal propensity to consume is 0.80.
If we account for crowding-out, then the increase in aggregate demand will be:

A. more than $750.00 billion.
B. less than $750.00 billion.
C. exactly $750.00 billion.
D. none of these

Answer 1

Answer:

B) less than $750.00 billion.

Explanation:

Crowding-out refers to a situation where private consumption and investment are lowered because government spending uses available financial resources and increases interest rates.

Crowding-out is the result of a government having to borrow money or increase taxes in order to increase spending.