Figure 34-6

question 115

Multiple Choice

Figure 34-6.On the left-hand graph,MS represents the supply of money and MD represents the demand for money;on the right-hand graph,AD represents aggregate demand.The usual quantities are measured along the axes of both graphs.
-Refer to Figure 34-6.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)$75 billion.
• B)$40 billion.
• C)$30 billion.
• D)$20 billion.

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Definitions:

Price

The financial value forecasted, demanded, or handed over as compensation for an item.

Quantity

The amount or number of a material or immaterial good that is considered as a unit or an aggregate.

Price Ceiling

A legal maximum price set by government on certain goods or services, intended to prevent prices from becoming too high.

Deadweight Loss

The loss of economic efficiency that occurs when the equilibrium for a good or a service is not achieved, leading to a misallocation of resources.