Which term refers to the reduction in demand that results when a fiscal expansion raises the interest rate?
A) multiplier effect
B) crowding-out effect
C) accelerator effect
D) catch-up effect

Question

Quizplus · Accepted Answer

The crowding-out effect refers to the reduction in demand that results when a fiscal expansion (government spending increase, tax reduction) raises the interest rate, making it more expensive for households and firms to borrow and reducing their willingness to increase consumption and investment. This effect limits the overall impact of the fiscal policy on the economy.

Which Term Refers to the Reduction in Demand That Results