Expansionary fiscal policy may crowd out both private investment and export spending.

Question

Quizplus · Accepted Answer

When the government increases its spending (through fiscal policy), it may lead to an increase in interest rates, reducing private investment because firms and households may find it more expensive to borrow money. Additionally, an increase in spending may lead to an appreciation of the currency, making exports more expensive and decreasing their demand. These effects are known as crowding out.

Expansionary Fiscal Policy May Crowd Out Both Private Investment and Export