Assuming a multiplier effect, but no crowding-out or investment-accelerator effects, a $100 billion increase in government expenditures shifts aggregate

a. demand rightward by more than $100 billion.

b. demand rightward by less than $100 billion.

c. supply leftward by more than $100 billion.

d. supply leftward by less than $100 billion.

Question

Business

Kian Hancock

16 May, 07:32

Assuming a multiplier effect, but no crowding-out or investment-accelerator effects, a $100 billion increase in government expenditures shifts aggregate

a. demand rightward by more than $100 billion.

b. demand rightward by less than $100 billion.

c. supply leftward by more than $100 billion.

d. supply leftward by less than $100 billion.

+3

Answers (1)

Know the Answer?

Lizeth Powell · Answer 1

The correct answer is option a.

Explanation:

The multiplier effect can be defined as the disproportionate increase in the final income due to an injection in the economy. When there is an injection such as an increase in government spending the final income will change by the size of the multiplier.

Here, in this case, an increase in government expenditure will lead to an increase in aggregate demand. The aggregate demand curve, as a result, will shift rightwards. The increase in the final output and income will be more than $100 billion because of the multiplier effect. As a result, the aggregate demand curve will shift to the right by more than $100 billion.