If private investment is relatively sensitive to interest rates, then a fiscal expansion financed by government bond sales will:
A)have no effect on output.
B)raise output by a relatively small amount.
C)raise output by a relatively large amount.
D)have an ambiguous effect on output.

Question

Quizplus · Accepted Answer

When private investment is sensitive to interest rates, a fiscal expansion financed by government bond sales will likely raise interest rates, crowding out some private investment. This means the increase in output will be smaller than it would be if private investment were less sensitive to interest rates.

If Private Investment Is Relatively Sensitive to Interest Rates, Then