The crowding out of private spending by government spending will be greater the
A)less sensitive consumption,investment,and net exports are to changes in interest rates.
B)more sensitive consumption,investment,and net exports are to changes in interest rates.
C)less sensitive consumption,investment,and net exports are to changes in the price level.
D)more sensitive consumption,investment,and net exports are to changes in the price level.

Question

Quizplus · Accepted Answer

When consumption, investment, and net exports are more sensitive to changes in interest rates, an increase in government spending will lead to a greater increase in interest rates, which will crowd out more private spending. This is because higher interest rates make borrowing more expensive and decrease the incentive to invest or consume, reducing private spending.

The Crowding Out of Private Spending by Government Spending Will