Suppose the government increases its purchases by Rs16 billion. If the multiplier effect exceeds the crowding out effect, then ?
Correct answer: C. The aggregate demand curve shifts to the right by more than Rs 16 billion
- A. The aggregate supply curve shifts to the right by more than Rs 16 billion
- B. The aggregate demand curve shifts to the left by more than Rs 16 billion
- C. The aggregate demand curve shifts to the right by more than Rs 16 billion
- D. the aggregate supply curve shifts to the left by more than Rs 16 billion
Explanation
The initial increase in government purchases raises aggregate demand, and the multiplier expands the effect beyond Rs16 billion. If this multiplier effect exceeds the offset from crowding out, aggregate demand shifts right by more than Rs16 billion.
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