When consumption and investment is reduced because of the higher interest rates induced by the government expansionary fiscal policy,the effect is called
A)the crowding-in effect.
B)the crowding-out effect.
C)the multiplier effect.
D)the budget effect.

Question

Quizplus · Accepted Answer

The reduction in consumption and investment due to higher interest rates is called the crowding-out effect. This occurs because, when the government increases its borrowing, the demand for loanable funds increases, which raises interest rates, making it more expensive for private investors to borrow money. As a result, they reduce their investment, which causes a decrease in aggregate demand.

When Consumption and Investment Is Reduced Because of the Higher