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If crowding out exists, contractionary fiscal policy will cause the aggregate demand curve to shift in...

If crowding out exists, contractionary fiscal policy will cause the aggregate demand curve to shift in by more than indicated by the government spending multiplier.

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Answer #1

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when there is contractionary fiscal policy then aggregate demand curve shifts to the leftward and Aggregate demand shifts to the left by less than government expenditure multiplier because when IS shifts to the left there will be decrease in interest rate which increases investment and thus final decrease in output is les than full multiplier effect.

Thus AD shifts to the left but by less than multiplier times

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