AD_{2(no crowding out)}

Price
level

Real GDP

AD_1

i

M

The Effect of Crowding Out in the Short Run

    The economy begins in a recession,
with real GDP of Y_1 but potential GDP
of Y. Shift the first slider to see what
happens in the absence of crowding
out. Then shift the second slider to see
the effect of crowding out.
    This graph shows that when an
expansionary fiscal policy is used, the
higher interest rate resulting from the 
increased government purchases will
reduce consumption, investment, and
net exports, causing AD to decrease.

AD_{2(crowding out)}

p_1

p_2

Y_1

Y_2

LRAS

SRAS

AD_2

2. . . .but the effect 
of crowding out 
causes a decrease 
in AD.

Y

1. Expansionary fiscal
policy causes the AD
curve to shift to the
right . . .

a = -1 (slider from -1 to 3, step 0.01)
u = Vector((0, 0), (10, 0))
v = Vector((0, 0), (0, 10))
g(x) = If[1 ≤ x ≤ 9, (0.8 * x) + 1]
b = -1 (slider from -1 to 0, step 0.01)
f(x) = If[1 ≤ x ≤ 9, ((-0.8) * x) + 8]
A = Intersect(g, f, (4.375, 4.5))
L_{Y1} = (0, 4.5)
c = Segment(L_{Y1}, A)
w(x) = If[1 ≤ x ≤ 9, ((-0.8) * x) + 8 + a - b]
L_{X2} = (6.88, 0)
L_{Y2} = (6.88, 9)
j = Segment(L_{Y2}, L_{X2})
A_{D1} = Point(f)
A_{D3} = (5, 7)
C = Point(w)
A_{D2} = (6.25, 7)
k = Vector(A_{D1}, A_{D2})
l = Vector(A_{D2}, A_{D3})
B = Intersect(g, w, (4.375, 4.5))
B_X: (x(B), 0)
B_Y: (0, y(B))
d = Segment(B_Y, B)
e = Segment(B, B_X)
Y_1 = (4.38, 0)
h = Segment(A, Y_1)