Crowding out occurs when expansionary fiscal policy leads to

Question

Quizplus · Accepted Answer

Crowding out occurs when expansionary fiscal policy, such as government increased spending, leads to a higher demand for loanable funds. This ultimately results in an increase in the interest rate, making it more expensive for businesses to borrow money and therefore reducing private investment. A reduction in net exports or the money supply is not a direct result of crowding out, and a higher price level is typically associated with inflationary pressures rather than fiscal policy. On the other hand, a reduction in the interest rate is not expected as a result of crowding out.

Crowding Out Occurs When Expansionary Fiscal Policy Leads to