The United States is experiencing a recession and Congress decides to adopt an expansionary ﬁscal policy to stimulate the economy. In this case, the crowding-out effect suggests that investment spending
Will
A) increase, thus partially offsetting the ﬁscal policy.
B) increase, thus partially reinforcing the ﬁscal policy.
C) decrease, thus partially offsetting the ﬁscal policy.
D) decrease, thus partially reinforcing the ﬁscal policy.

Question

Quizplus · Accepted Answer

The crowding-out effect suggests that when the government increases its spending, it leads to an increase in interest rates in order to borrow money. This increase in interest rates makes it more expensive for businesses and individuals to borrow money for investment purposes, which results in decreased investment spending. Therefore, in this case, the adoption of expansionary fiscal policy by Congress would lead to a decrease in investment spending, thus partially offsetting the fiscal policy.

The United States Is Experiencing a Recession and Congress Decides