If crowding out occurs in the long run and the government increases spending for infrastructure projects such as roads and bridges, then the additional government spending:
A) decreases total consumption spending in the economy.
B) replaces a larger amount of private investment.
C) enhances private investment by the same amount.
D) replaces an equivalent amount of private investment.

Question

Quizplus · Accepted Answer

Crowding out is a phenomenon where an increase in government spending leads to a decrease in private investment. In the case of infrastructure projects, the government's increase in spending may cause interest rates to rise, making borrowing more expensive for private firms. This, in turn, may lead to a decrease in private investment. Therefore, the additional government spending would most likely replace an equivalent amount of private investment, resulting in no net increase in investment in the economy.

If Crowding Out Occurs in the Long Run and the Government