The government of Arissa increased its spending by $100 billion.However,the corresponding change in output was much smaller than that predicted by the government expenditure multiplier.This occurs because of ________.

Question

Quizplus · Accepted Answer

Crowding out occurs when an increase in government spending leads to a decrease in private sector spending, which partially or fully offsets the initial increase in government spending. This occurs when higher government spending leads to higher interest rates, which raise the cost of borrowing for firms and households, reducing their spending. Thus, the government expenditure multiplier is smaller than predicted, leading to a smaller increase in output.

The Government of Arissa Increased Its Spending by $100 Billion