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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

User Ali Imran
by
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1 Answer

3 votes

Answer:

B) less than $750.00 billion.

Step-by-step 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.

User Kartik Bhatt
by
7.6k points
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