Crowding out will be greater
A)the less sensitive consumption spending is to changes in the interest rate.
B)the further equilibrium GDP is below potential GDP.
C)the more sensitive investment spending is to changes in the interest rate.
D)if the economy is in recession,rather than at full employment.

Question

Quizplus · Accepted Answer

Crowding out refers to a situation where increased government spending leads to a reduction in private sector spending, particularly investment, due to rising interest rates. Choice C is correct because if investment spending is more sensitive to changes in the interest rates, an increase in government spending (which can lead to higher interest rates) would significantly reduce investment spending, leading to greater crowding out.

Crowding Out Will Be Greater