Some economists believe that financing deficit spending by increasing taxes will lead to a lower level of national consumption and a higher level of national savings than deficit spending. The reason is
A) people believe that they can consume the government provided goods and have future generations pay the bill.
B) that people do not realize that taxes have increased also.
C) people will forgo private consumption now as society substitutes government goods for private goods.
D) the interest rate on the debt will increase.

Question

Quizplus · Accepted Answer

When taxes are increased to finance deficit spending, people may forgo private consumption in favor of government-provided goods, leading to a lower level of national consumption. At the same time, the increased taxes may also lead to a higher level of national savings as people save more due to reduced disposable income. This phenomenon is known as the "crowding out" effect, where government spending crowds out private consumption and investment.

Some Economists Believe That Financing Deficit Spending by Increasing Taxes