According to the crowding-out effect,an increase in government spending
A)increases the interest rate and so increases investment spending.
B)increases the interest rate and so decreases investment spending.
C)decreases the interest rate and so increases investment spending.
D)decreases the interest rate and so decreases investment spending.

Question

Quizplus · Accepted Answer

According to the crowding-out effect, an increase in government spending leads to an increase in demand for loanable funds, which results in an increase in interest rates. Higher interest rates discourage private investment in businesses and homes, thus decreasing investment spending. Therefore, option B is the correct answer.

According to the Crowding-Out Effect,an Increase in Government Spending