If the government increases purchases by Rs16 billion and the multiplier effect outweighs the crowding-out effect, what will happen?
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Answer: C. The aggregate demand curve shifts to the right by more than Rs 16 billion
Explanation
Government spending increases shift aggregate demand outward through multiplier effects. Dominance of the multiplier ensures the aggregate demand shift exceeds spending. Crowding out fails to fully offset the initial fiscal policy expansion. The government purchases multiplier magnifies the initial injection of public spending. Crowding out occurs when higher interest rates reduce private investment spending. Aggregate demand represents total spending across all sectors of the economy.
Fiscal policy packages use government spending to stimulate lagging economic growth. Understanding multipliers helps governments design effective macroeconomic stimulus programs. Net shifts in demand determine the magnitude of short-run GDP expansion. Aggregate supply curves do not shift directly from government purchases. Aggregate demand shifts to the right during expansionary fiscal policies. Leftward shifts in aggregate demand occur during contractionary fiscal policy.
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