ECONOMICS (CBSE/UGC NET)

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ECONOMICS

AGGREGATE DEMAND

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
When an increase in government purchases increases the income of some people, and those people spend some of that increase in income on additional consumer goods, we have seen a demonstration of
A
The multiplier effect
B
The investment accelerator.
C
The crowding-out effects.
D
Supply-side economics.
Explanation: 

Detailed explanation-1: -For example, an increase in government spending directly increases demand for goods and services, which can help increase output and employment. On the other hand, contractionary fiscal policy can be used by governments to cool down the economy during an economic boom.

Detailed explanation-2: -When government increases its spending, it stimulates aggregate demand, and causes some real GDP growth. That growth creates jobs, and more workers earn income.

Detailed explanation-3: -The crowding-out effect: The crowding-out effect works in the opposite direction of the multiplier. An increase in government purchases (as in the case above) raises incomes, which shifts the demand for money to the right. This raises the interest rate, which lowers investment.

Detailed explanation-4: -CROWDING OUT PRIVATE SPENDING AND EMPIRICAL EVIDENCE Taxes finance government spending; therefore, an increase in government spending increases the tax burden on citizens-either now or in the future-which leads to a reduction in private spending and investment. This effect is known as “crowding out."

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