Suppose that the U.S. has an open economy and is currently at full employment. When the federal government decreases spending on Medicare, crowding in will not take the form of:

Question

Quizplus · Accepted Answer

Crowding in refers to the increase in private sector spending that occurs when the government decreases spending or reduces its budget deficit. In this scenario, a decrease in spending on Medicare would not lead to an increase in government spending, so option C is incorrect. However, it could lead to an increase in investment spending (option A) or an increase in consumption spending (option B) as individuals and businesses have more resources available to them. It could also lead to an increase in net exports (option D), since a decrease in government spending could lead to a decrease in the trade deficit, assuming other factors remain constant.

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