An increase in government expenditure can crowd out consumption and investment expenditure.

Question

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When there is an increase in government expenditure, it leads to higher demand for goods and services. This can lead to an increase in prices, which can lead to inflation. Inflation reduces the purchasing power of individuals and increases the cost of borrowing for firms. This can lead to a decrease in consumption and investment expenditure, as individuals and firms have less money to spend or invest. This phenomenon is known as crowding out.

An Increase in Government Expenditure Can Crowd Out Consumption and Investment