Expansionary fiscal policy falls short of its goal.Some economists claim it is due to indirect crowding out.What evidence is consistent with this claim?

Question

Quizplus · Accepted Answer

The increase in interest rates is consistent with the claim of indirect crowding out. When the government implements expansionary fiscal policy, it usually leads to an increase in demand for credit, which in turn leads to an increase in interest rates. This increase in interest rates may discourage private sector investment and consumption, and therefore may reduce the effectiveness of the fiscal policy. So, an increase in interest rates is evidence of crowding out. The other options are not necessarily indicative of crowding out.

Expansionary Fiscal Policy Falls Short of Its Goal