Suppose the government attempts to stimulate the economy by increasing spending without increasing taxes.Which of the following statements is most likely to be accepted by someone who believes in crowding out?
A) The government's actions will have their intended effect.
B) The government's actions will cause businesses to become more optimistic about the economy,and they will increase their output even more than the government had intended.
C) The government's actions will raise interest rates,causing decreased investment and consumption,and the economy will not expand as much as the government had intended.
D) This is a trick question,because the federal government is required by law to increase taxes by the same amount as it increases expenditures.

Question

Quizplus · Accepted Answer

The concept of crowding out suggests that increases in government spending may lead to higher interest rates, which in turn may cause a decrease in private investment and consumption. Therefore, someone who believes in crowding out is likely to choose option C as the most likely outcome of the government's attempt to stimulate the economy through increased spending without raising taxes.

Suppose the Government Attempts to Stimulate the Economy by Increasing