Crowding out occurs when
A)an increase in defense spending causes a decrease in consumption
B)expansionary monetary policy fails to stimulate economic growth
C)expansionary fiscal policy causes interest rates to rise, thereby reducing private spending
D)tax increases result in a drop in consumption
E)a policy designed to increase the budget surplus causes the economy to enter a recession

Question

Quizplus · Accepted Answer

Crowding out occurs when government spending increases and causes interest rates to rise. This, in turn, decreases private investment by making borrowing more expensive, resulting in a decrease in consumption. This phenomenon is commonly observed with expansionary fiscal policies, such as increased government spending or reduced taxes, which can contribute to a budget deficit or debt.

Crowding Out Occurs When