Asked by Jonathan Ghansiam on Jun 24, 2024
Verified
Which of the following correctly explains the crowding-out effect?
A) An increase in government expenditures decreases the interest rate and so increases investment spending.
B) An increase in government expenditures increases the interest rate and so reduces investment spending.
C) A decrease in government expenditures increases the interest rate and so increases investment spending.
D) A decrease in government expenditures decreases the interest rate and so reduces investment spending.
Crowding-out Effect
A situation where increased government spending leads to a reduction in private sector spending and investment, often due to higher interest rates.
Government Expenditures
The total amount spent by the government on various services, including healthcare, education, and infrastructure.
Interest Rate
The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage.
- Grasp the crowding-out effect and its implications on fiscal policy and investment.
Verified Answer
GK
Given KumakoJun 27, 2024
Final Answer :
B
Explanation :
The crowding-out effect occurs when increased government spending leads to higher interest rates, which in turn reduces investment spending by the private sector. This is because government borrowing to finance its expenditures can lead to a decrease in the supply of savings available for private investment, pushing interest rates up.
Learning Objectives
- Grasp the crowding-out effect and its implications on fiscal policy and investment.