162k views
0 votes
Suppose the multiplier is 5 and the government increases its purchases by $15 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Also, suppose the horizontal distance between the curves AD1 and AD3 is $55 billion. The extent of crowding out, for any particular level of the price level, is:______

A) 20 billion
B) 30 billion
C) 10 billion
D) 40 billion

1 Answer

4 votes

Answer:

A) 20 billion

Step-by-step explanation:

Y = AD

= C + I + G

C = A + cY

A - Autonomous Consumption

c - MPC

Y = A + cY + I + G

Y - cY = A + I + G

Y(1 - c) = A + I + G

Y = (A + I + G)*1/(1 - c)

Taking derivative with respect to goverement purchase

dY/dG = 1/(1 - c)

( here d is represting del we are representing partial derivative.)

1/(1 - c) = Multiplier

dY = Multiplier*dG

= 5*15

= 75

75 = horizontal distance between AD1 & AD2

55 = horizontal distance between AD1 & AD3

Extent of crowding out = 75 - 55 = 20

Therefore, the Extent of crowding out is 20 billion.

User The Jug
by
8.4k points
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.

9.4m questions

12.2m answers

Categories