Crowding out occurs by:
A)causing reduced government purchases of goods and services.
B)reducing the value of the multiplier used for government purchases of goods and services by increasing the interest rate.
C)reducing the value of the multiplier used for government purchases of goods and services by increasing the marginal propensity to consume.
D)reducing the value of the multiplier used for government purchases of goods and services by decreasing the marginal propensity to consume.
E)causing reduced imports of goods and services.

Question

Quizplus · Accepted Answer

Crowding out occurs when the government increases its borrowing to finance a deficit, which raises interest rates and reduces private-sector investment. The higher interest rate reduces the value of the multiplier used for government purchases of goods and services, meaning that each dollar of government spending is associated with less than a dollar of increase in GDP.

Crowding Out Occurs By