The crowding-out effect of expansionary ﬁscal policy suggests that
A) government spending increases at the expense of private investment.
B) imports replace domestic production.
C) private investment increases at the expense of government spending.
D) saving increases at the expense of investment.

Question

Quizplus · Accepted Answer

The crowding-out effect of expansionary fiscal policy suggests that government spending increases at the expense of private investment. This happens because when the government increases its spending, it may borrow more from the financial market, which leads to higher interest rates. As a result, private investment becomes more expensive, and some firms may choose to reduce their investments, which could lead to a reduction in economic growth. Thus, expansionary fiscal policy may crowd out private investment.

The Crowding-Out Effect of Expansionary ﬁScal Policy Suggests That