An expansionary fiscal policy that takes the form of an increase in government purchases carries the possibility that private investment ________ and,as a result,the future growth rate of ________.
A)rises to an unsustainable level; real GDP is reduced
B)is crowded out; corporate tax revenue is reduced
C)increases; aggregate demand increases
D)increases; net exports increases
E)is crowded out; potential output is reduced

Question

Quizplus · Accepted Answer

An expansionary fiscal policy, such as an increase in government purchases, can lead to higher interest rates as the government competes for financing with the private sector. This can crowd out private investment because higher interest rates make borrowing more expensive for businesses. When private investment is crowded out, it can reduce the future growth rate of potential output, as less investment in capital goods today means lower productive capacity in the future.

An Expansionary Fiscal Policy That Takes the Form of an Increase