An increase in government expenditure can crowd out consumption and investment expenditure.
If the government borrows the money from the private sector or taxes the private sector to pay for government expenditures,less credit may be available to finance private consumption and investment,creating an offsetting reduction in private demand.Either way,government spending may "crowd out" some private expenditure.

Question

Quizplus · Accepted Answer

This statement is true. When government expenditure increases and it borrows money from the private sector or taxes the private sector to pay for it, it can lead to a reduction in private consumption and investment expenditure, which is known as crowding out.

An Increase in Government Expenditure Can Crowd Out Consumption and Investment