Suppose the government increases its purchases by $50 billion. If the multiplier effect exceeds the crowding-out effect, then:

Question

BlackTom AI · Accepted Answer

To analyze the effect of an increase in government purchases when the multiplier exceeds the crowding-out effect, we need to focus on which curve moves and in which direction.
Option a: 'the aggregate-supply curve shifts to the right by more than $50 billion.' The aggregate-supply (AS) curve typically does not shift simply due to changes in fiscal demand; fiscal multipliers primarily affect aggregate demand (AD). A larger-than-$50 billion increase from another channel would be reflected in AD, not AS. Therefore this option is not correct in the standard model.
Option b: 'the aggregate-supply curve shifts to the left by more than $50 billion.' A leftward shift of AS would indicate a worsening supply conditions or higher costs, which is not the expected outcome from the multiplier exceeding crowding-out. Since the question describes an expansionary fiscal stance with a net positive demand effect, AS would not shift left in this scenario. This makes this choice incorrect.
Option c: 'the aggregate-demand curve shifts to the left by more than $50 billion.' A leftward shift in AD would imply a contraction in overall demand, contrary to increasing government purchases. If the multiplier surpasses crowding-out, the net effect is an expansion of demand, not a contraction. Thus this option is incorrect.
Option d: 'the aggregate-demand curve shifts to the right by more than $50 billion.' When the government spends more, the initial increase in spending raises aggregate demand. If the multiplier effect exceeds crowding out, the total increase in AD is greater than the initial $50 billion, so the AD curve shifts to the right by more than $50 billion. This aligns with the standard Keynesian framework where the net fiscal impulse exceeds any dampening from crowding out, enhancing overall demand. Therefore this option correctly captures the described scenario.

Suppose the government increases its purchases by $50 billion. If the multiplier effect exceeds the crowding-out effect, then:

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