The crowding out effect of expansionary fiscal policy refers to which of the following?
A)a reduction in private sector planned investment
B)a reduction in the stock of inventories
C)the reduction in the size of the budget deficit
D)the reduction in the size of the recessionary gap

Question

Quizplus · Accepted Answer

The crowding out effect of expansionary fiscal policy refers to a reduction in private sector planned investment. When the government increases its spending, it will compete with the private sector for the available resources, such as labor and capital. This increased demand for resources will lead to higher interest rates, which in turn will discourage firms from borrowing or investing in long-term projects. Thus, private sector investment will be crowded out by increased government spending.

The Crowding Out Effect of Expansionary Fiscal Policy Refers to Which