The decrease in consumption and investment interest-related spending that occurs when the interest rate rises as government spending increases is called:
A)crowding in.
B)crowding out.
C)neutral.
D)none of the above.

Question

Quizplus · Accepted Answer

Crowding out refers to the decrease in consumption and investment interest-related spending that occurs when the interest rate rises as government spending increases. This happens because when the government spends more, it competes with private borrowers for funds, which leads to higher interest rates, making it more expensive for individuals and businesses to borrow money. As a result, they reduce their spending and investment, leading to a decrease in aggregate demand.

The Decrease in Consumption and Investment Interest-Related Spending That Occurs