AP Macroeconomics Question 19: Answer and Explanation

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Question: 19

2. There is relatively more crowding out as the result of expansionary fiscal policy when

  • A. expansionary monetary policy accompanies the fiscal policy
  • B. the investment demand curve is inelastic
  • C. government spending improves profit expectations among businesses
  • D. aggregate supply is vertical
  • E. the investment demand curve is elastic

Correct Answer: E


E Crowding out is a decrease in real investment as a result of government purchases. Government purchases are part of the fiscal policy, so eliminate (A). Impact of government purchases is felt on the demand side, so eliminate (D). When the investment demand curve is elastic, a small increase in government purchases will have a larger reduction in demand for money. Therefore the answer is (E).