Crowding out I. limits increases in aggregate demand due to fiscal policy. II. affects expansionary fiscal policy. III. increases the multiplier effect.

Question

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Crowding out refers to the phenomenon where an increase in government spending financed by borrowing leads to higher interest rates, which in turn reduces private investment and consumption. This limits increases in aggregate demand due to fiscal policy, which is represented by statement I. Statement II is also true because expansionary fiscal policy relies on increased government spending, which can be crowded out by higher interest rates. However, statement III is false as crowding out reduces the multiplier effect by reducing private spending, which offsets the impact of government spending.

Crowding Out I