Asked by Matthew Flint on May 09, 2024
Verified
If a federal budget deficit causes crowding out,_____.
A) real GDP does not increase by as much as the government purchases of goods and services multiplier would predict because the marginal propensity to consume decreases
B) real GDP does not increase by as much as the government purchases of goods and services multiplier would predict because investment decreases
C) interest rates fall,reducing the burden of the debt
D) firms become more willing to invest
E) interest rates fall,so that decreases in investment and government purchases of goods and services exactly offset the expansionary effect of the deficit
Crowding Out
The phenomenon where increased government borrowing leads to higher interest rates, reducing private investment and spending in the economy.
Real GDP
The measure of a country's gross domestic product adjusted for inflation, reflecting the real value of goods and services produced.
Marginal Propensity
The ratio of change in consumption to the change in income, indicating how much of additional income will be spent or saved.
- Learn about the dynamics of crowding in and crowding out in the arena of fiscal policy and their impact on private investment.
Verified Answer
BH
Bùi Hoàng ChungMay 12, 2024
Final Answer :
B
Explanation :
Crowding out occurs when an increase in government spending financed by a deficit leads to higher interest rates, which in turn reduces private investment. As a result, real GDP does not increase by as much as the government purchases of goods and services multiplier would predict because investment decreases.
Learning Objectives
- Learn about the dynamics of crowding in and crowding out in the arena of fiscal policy and their impact on private investment.