If the government implements an expansionary fiscal policy using borrowing funds and there is complete crowding out, then private investment will _____, and the aggregate demand will:

Question

Quizplus · Accepted Answer

When the government borrows funds to finance expansionary fiscal policy, it can lead to complete crowding out, where increased government borrowing drives up interest rates, making it more expensive for the private sector to borrow. This can decrease private investment. However, because the policy is expansionary, it aims to increase aggregate demand through government spending. In the case of complete crowding out, the increase in government spending is exactly offset by the decrease in private investment, leaving aggregate demand unchanged.

If the Government Implements an Expansionary Fiscal Policy Using Borrowing