The crowding-out effect occurs when household consumption and investment spending increase as a result of a decrease in the demand for money.

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when an increase in government spending leads to a decrease in private-sector spending, particularly investment spending. This typically occurs when the government borrows funds to finance its spending, which increases the demand for money and drives up interest rates, making it more costly for businesses and households to borrow and spend. This means that the crowding-out effect is actually the opposite of the scenario described in the question - it's not a result of a decrease in the demand for money, but rather an increase in it due to government spending.

The Crowding-Out Effect Occurs When Household Consumption and Investment Spending