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An increase in government spending shifts the IS curve to the right, which increases both aggregate output and the interest rate. Because the higher interest rate dampens private investment demand, the net expansion in output is smaller than the simple Keynesian multiplier would predict ('crowding-out effect').
1. **Plain-English Mechanism**: When the government spends more, it borrows heavily in bond markets, pushing up interest rates. Higher interest rates make corporate loans and mortgages more expensive—so private businesses cancel investment projects and consumers buy fewer homes. The lost private investment partially 'cancels out' the government's spending boost.
2. **Check-Your-Understanding Question**: *What would happen to the crowding-out effect if the Central Bank simultaneously expanded the money supply (shifted the LM curve right) to keep interest rates flat?*
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Comparing in-page Socratic tutoring with passive AI answer generators.
| Method | Builds Genuine Exam Mastery | Works on Any Web Textbook |
|---|---|---|
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| Copy-pasting questions to get full solutions | Finishing homework in 5 minutes | Zero retention; leads to failing closed-book midterm exams |
| Re-reading textbook chapters 3 times | Familiarity with vocabulary | Scientifically proven to be the least effective study strategy |
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