An increase in government spending can result in crowding-out.Which of the following is a correct statement of the process?
A)It leads to a decrease in savings,which leads to a decrease in investment spending.
B)It leads to an increase in money supply,which pushes interest rates up and causes a decrease in investment spending.
C)It causes bond prices to increase,which pushes interest rates up and leads to a decrease in investment spending.
D)It increases the price level and the demand for money,which causes interest rates to increase and investment spending to decrease.
E)It leads to an increase in GDP and in savings,which increases investment spending

Question

Quizplus · Accepted Answer

When the government spends more money, it increases the demand for goods and services, which leads to an increase in prices. This increase in prices causes an increase in demand for money, which leads to an increase in interest rates. The higher interest rates make it expensive for firms to borrow and invest, which leads to a decrease in investment spending. Therefore, an increase in government spending leads to a decrease in investment spending through an increase in interest rates, which is called crowding-out.

An Increase in Government Spending Can Result in Crowding-Out