Critics of Keynesian fiscal policy argue that deficit spending will not stimulate the economy, because higher interest rates will discourage consumption and investment. This argument is known as the:

Question

Quizplus · Accepted Answer

The argument that deficit spending will lead to higher interest rates and therefore discourage consumption and investment is known as the crowding-out effect. This is because when the government borrows money to finance its spending, it increases the demand for loanable funds and puts upward pressure on interest rates, which in turn reduces private investment and consumption.

Critics of Keynesian Fiscal Policy Argue That Deficit Spending Will