When an increase in government purchases raises incomes, shifts money demand to the right, raises the interest rate, and lowers investment, we have seen a demonstration of

Question

a. the investment accelerator.
b. the multiplier effect.
c. the crowding-out effect.
d. supply-side economics.
e. the liquidity trap.

Answer 1

The scenario you've described illustrates c. the crowding-out effect.

When government purchases increase, this can lead to higher incomes, which in turn increases the demand for money. As the demand for money rises, interest rates tend to increase as well. Higher interest rates can discourage private investment, effectively "crowding out" private sector spending due to the rise in cost of borrowing.

The other options (investment accelerator, multiplier effect, supply-side economics, and liquidity trap) do not accurately describe the interactions you've outlined in this particular scenario.