When used in connection with fiscal policy, the term "crowding out" refers to:
A) the ways that the policy effectively crowds out inflation and unemployment from the economy.
B) a decrease in government spending, which ends up "crowding out" or decreasing aggregate demand.
C) tradeoffs among different types of spending in the economy, which results in more government spending having a smaller impact on total spending.
D) the growth of output as an economy makes full use of its idle resources.

Question

Quizplus · Accepted Answer

Crowding out refers to a situation where increased government spending leads to a reduction in private sector spending, which can happen because the government borrowing to finance its spending leads to higher interest rates, making it more expensive for the private sector to borrow and invest.

When Used in Connection with Fiscal Policy, the Term "Crowding