Crowding-out occurs when
A) supply-side fiscal policy does not increase total output.
B) consumption increases when government spending increases.
C) private spending falls in response to increases in government spending.
D) time lags crowd out the effects of fiscal policy.
E) increases in government spending and decreases in taxes are offset by increases in savings.

Question

Quizplus · Accepted Answer

Crowding-out occurs when a government increases its spending in a particular sector, which leads to a fall in private spending in the same sector. As a result, the net effect on total output and employment is neutral or negative. This happens because the increase in government spending raises demand for goods and services, leading to higher prices, and in turn, making goods and services relatively more expensive for the private sector. Therefore, the private sector reduces its spending, which offsets the government's increase in spending. This phenomenon is called crowding-out, and it happens because of the finite resources available in the economy.

Crowding-Out Occurs When