Crowding out is a reduction in private investment caused by government budget deficits,and may partially offset the expansionary effects of fiscal policy.The exact degree of crowding out depends on all of the following except
A) how much of the deficit is financed by households, firms, and governments outside of Canada.
B) how much real interest rates increase.
C) the level of the marginal corporate income tax rate.
D) the sensitivity of investment to the real interest rate.

Question

Quizplus · Accepted Answer

The level of the marginal corporate income tax rate is not directly related to the degree of crowding out. The other options are directly related to the degree of crowding out, as the amount of deficit financing from different sources, the increase in real interest rates, and the sensitivity of investment to real interest rates all affect the extent of crowding out.

Crowding Out Is a Reduction in Private Investment Caused by Government