Crowding out:
A) limits the increase in aggregate demand due to fiscal policy.
B) affects contractionary fiscal policy.
C) increases the multiplier effect.
D) shifts the LRAS curve to the left.

Question

Quizplus · Accepted Answer

Crowding out occurs when the government increases its borrowing to finance a fiscal policy, creating a higher demand for loanable funds. This increased demand for loanable funds may cause interest rates to rise and reduce private sector investment. As a result, aggregate demand may not increase significantly, limiting the effectiveness of fiscal policy. Therefore, choice A is the correct answer. Choices B, C, and D are incorrect as they do not accurately describe the effects of crowding out.

Crowding Out