Suppose a government finances its expansionary fiscal policy by borrowing from the public. Joseph is concerned that this will increase the demand for loanable funds, drive up interest rates, and leave less loanable money available for consumers and businesses. Joseph is concerned about the _____ effect.
A) boomerang
B) opposite expansionary
C) ricochet
D) crowding-out

Question

Quizplus · Accepted Answer

The situation described in the scenario is an example of the crowding-out effect. When the government borrows money from the public, it increases the demand for loanable funds, which in turn drives up interest rates. This can cause consumers and businesses to reduce their borrowing and investment, as they have less loanable money available to them. This is known as the crowding-out effect, as government borrowing "crowds out" private borrowing and investment.

Suppose a Government Finances Its Expansionary Fiscal Policy by Borrowing