Suggested solution: Government stimulus spending has the effect of raising the aggregate expenditures line in the aggregate expenditures model. Due to the multiplier effect, this initial increase in spending has the effect of increasing income by a greater amount that the initial increase in government spending. The increase in income counteracts to some extent the income reducing effect of the downturn. (Answers may vary)

Suggested solution: Lower-income people have a higher marginal propensity to consume (spend rather than save), especially during periods of economic stress. Government programs, such as unemployment benefits and targeted tax cuts, that direct funds to this segment of the population have a higher multiplier than if the funds were directed at people with a lower marginal propensity to consume (save rather than spend). As a result, programs directed at low-income people have a greater impact on aggregate expenditures than if the funds were directed at another segment of the population. (Answers may vary.)

Suggested solution: When a government increases spending or reduces taxes, deficits are likely to increase. This requires the government to issue more debt. Issuing more government debt increases the ongoing interest rates. Higher interest rates make it more expensive for businesses to borrow, causing some potential investments to be financially infeasible. Hence, when Government borrowing displaces private investment by making it more expensive, it is referred to as the crowding out effect. By retarding business investment, this phenomenon has the effect of reducing the aggregate expenditures, counteracting (at least in part) the stimulating effects of government spending. (Answers may vary.)