Macro question

[Homer Simpson]

answer is (c). wondering why (b) or (a) cant be possible?? please explain :)

[Dreyfus]

Tsuki..when we talk about crowding out then we refer only one point that is the effect of 'fiscal policy' on Investment spending.
Now as per the question ...in option a. There is monetary policy not fiscal therefore option a rules out
In option b..it only referring the IS relation alone that is it is not considering asset market
In option d....fiscal policy is there but again it only referring IS nd its affect on consumption
Now in option c.....there is fiscal exp....nd due to this IS will shift to the right but when Y* rises the demand for money also rises nd in order to clear the asset market the interest rate will rise nd this rise in interest rate will directly affect Investment spending as I increases the investment will decline leading to crowding out....

[ViV]

Option (a) can't be the answer because this will affect LM Curve.
Option (b) is not the answer this you will get to know after reading the explanation of option (c)
Option (c)
IS : C+I+G-T
Y' = 100 let T = 10 (Lump-sum Tax)
Y'' = 105 let T = 5 (fall in T)
So Income increases IS curve shifts right and corresponding to this rate of interest increases and crowding out takes place.

[Homer Simpson]

thanks Vaibhav and Viv. now its clear!