The crowding-out effect occurs when an expansionary fiscal policy increases the interest rate, decreases investment spending, and weakens fiscal policy.

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when an expansionary fiscal policy, such as an increase in government spending or a decrease in taxes, leads to a higher demand for borrowing, which pushes up interest rates. This, in turn, can reduce private investment spending as businesses and individuals may find it more expensive to borrow money for their own investment projects. As a result, the overall impact of fiscal policy may be weakened by the crowding-out effect.

The Crowding-Out Effect Occurs When an Expansionary Fiscal Policy Increases