The crowding-out effect

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when government spending increases, which could lead to a decrease in private spending due to a decrease in available funds for private investment. Therefore, some private investment is replaced with government spending. This can occur even during recessions when the economy needs private investment to spur growth. Thus, the crowding-out effect is generally seen as a problem for economic growth. Therefore, option A is correct. B and D are incorrect because crowding-out effect decreases the value of the spending multiplier and reduces the efficacy of discretionary fiscal policy.

The Crowding-Out Effect