Crowding out of private expenditure occurs when
A)increases in the price level lowers the real wage.
B)the money supply is decreased.
C)the money supply is increased.
D)government spending decreases.
E)government spending increases.

Question

Quizplus · Accepted Answer

Crowding out of private expenditure occurs when government spending increases, leading to a decrease in the private sector's spending as resources are diverted to the government. This can happen because the increased demand for goods and services from the government leads to higher prices, which reduce the purchasing power of consumers and businesses. Additionally, government borrowing to finance the increased spending can raise interest rates, making it more expensive for the private sector to invest and borrow.

Crowding Out of Private Expenditure Occurs When