Figure 16-6

question 239

Multiple Choice

Figure 16-6. 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 16-6. Suppose the multiplier is 5 and the government increases its purchases by $10 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 $20 billion. The extent of crowding out, for any particular level of the price level, is

• A) the horizontal distance between the curves MD₁ and MD₂.
• B) $40 billion.
• C) $30 billion.
• D) $20 billion.

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