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)is crowded out; potential output is reduced
B)increases; aggregate demand increases
C)is crowded out; corporate tax revenue is reduced
D)rises to an unsustainable level; real GDP is reduced
E)increases; net exports increases

Question

Quizplus · Accepted Answer

An expansionary fiscal policy in the form of an increase in government purchases may raise interest rates, which can discourage private investment by making it more expensive to borrow money. This is known as crowding out. As a result, potential output may be reduced because private investment is a key driver of economic growth.

An Expansionary Fiscal Policy That Takes the Form of an Increase