16. Which effect does increased government spending have on aggregate demand for goods and services if the multiplier effect is greater than the crowding-out effect?
Answer: B
Aggregate demand increases by more than the increase in government spending.
Increased government spending leads to a rise in aggregate demand for goods and services, particularly when the multiplier effect outweighs the crowding-out effect. This means that for every dollar spent by the government, the overall increase in demand is amplified, resulting in a greater total increase in aggregate demand.
A) Aggregate demand decreases by less than the increase in government spending.
This option is incorrect because it suggests that aggregate demand would decrease, which contradicts the premise of increased government spending. In the scenario where the multiplier effect is greater than the crowding-out effect, aggregate demand cannot decrease; it must increase.
B) Aggregate demand increases by more than the increase in government spending.
This option is correct as it accurately reflects the scenario where the multiplier effect predominates. When government spending injects money into the economy, it stimulates consumption and investment, leading to an increase in aggregate demand that exceeds the initial spending amount.
C) Aggregate demand increases by less than the increase in government spending.
This option is incorrect because it underestimates the impact of the multiplier effect. If the multiplier effect is greater than the crowding-out effect, aggregate demand should increase more significantly than the initial government spending, not less.
D) Aggregate demand decreases by more than the increase in government spending.
This option is also incorrect as it implies a net negative effect on aggregate demand, which is not possible in the context provided. The scenario assumes that increased government spending leads to an increase in aggregate demand due to the multiplier effect, thus contradicting the idea of a decrease.
Conclusion
The correct answer, which states that aggregate demand increases by more than the increase in government spending, is supported by the understanding of the multiplier effect's dominance over any potential crowding-out effects. All other options fail to accurately convey the relationship between government spending and aggregate demand in this context, making them incorrect.