"Crowding out" occurs as an expansionary fiscal policy __________ interest rates, thus __________ investment spending.

Question

Quizplus · Accepted Answer

When the government increases its spending through an expansionary fiscal policy, it increases the demand for funds which in turn raise interest rates. As interest rates increase, private investment spending becomes more expensive, leading to a decrease in investment spending. This phenomenon is known as crowding out, and choice B is the correct answer as it reflects the relationship between expansionary fiscal policy, interest rates, and investment spending.

"Crowding Out" Occurs as an Expansionary Fiscal Policy __________ Interest