An economist who believes that increases in government spending will not increase aggregate demand,may cite crowding out as the reason for this belief.

Question

Quizplus · Accepted Answer

Crowding out is the process by which government borrowing to finance its spending leads to higher interest rates, which in turn reduces private investment spending. This can counteract the intended increase in aggregate demand from government spending, making it less effective in stimulating the economy. Thus, an economist who believes in crowding out would argue that increases in government spending may not increase aggregate demand as much as expected.

An Economist Who Believes That Increases in Government Spending Will