As G rises GDP or Y rises so that we move along the Consumption curve (shown in

As G rises GDP or Y rises so that we move along the Consumption curve (shown in red). The demand for transactions rises so that money demand shifts to right. This causes r to rise from rA to rB. This rise reduced I from IA to IB. This is the traditional crowding out effect. As per Barro the decline in I and other components can equal the rise in G causing Y to remain unchanged. This is seen as a shift of I curve inwards. This shows that even if r rises due to higher demand for money balances investment declines (shown by I) Y will decline to cause C to decline again so that we reach old level of Y making the multiplier 0.Scenario 2: G rises the fed completely accommodates the shock to money demand so that interest rates remain unchanged (identical to the Romer assumption). Show this development as point C on all three diagrams.