If the Crowding-Out Effect Is at Its Maximum Strength, It

question 86

Multiple Choice

If the crowding-out effect is at its maximum strength, it follows that an increase in government spending will

• A) cause aggregate demand and GDP to increase.
• B) cause aggregate demand and GDP to decrease.
• C) not affect aggregate demand and GDP.
• D) not cause the budget deficit to increase.

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Definitions:

Diseconomies of Scale

Occur when a company or business grows so large that the costs per unit increase. It represents the negative counterpart to economies of scale.

Economies of Scale

The cost advantages that enterprises obtain due to their scale of operations, with cost per unit of output generally decreasing with increasing scale.

Economies of Scale

The price benefits that firms enjoy from the magnitude of their operations, where the cost of each output unit generally lessens as the scale of operations increases.

Unit Costs

The financial outlay for a company to manufacture, warehouse, and dispose of one unit of a specific item or service.