The crowding out effect of fiscal policy refers to:
A) the decrease in private spending as a result of higher government spending.
B) the decrease in real GDP growth as a result of higher government spending.
C) how more federal government spending affects the sizes of state and local governments.
D) the increase in tax revenues as a result of an increase in government spending.

Question

Quizplus · Accepted Answer

The crowding out effect of fiscal policy occurs when the government increases its spending, causing interest rates to rise and reducing the amount of borrowing and spending by private individuals and businesses. This results in a decrease in private spending, as mentioned in option A. Option B is incorrect because crowding out does not necessarily lead to a decrease in real GDP growth. Option C is incorrect because it is not related to the crowding out effect. Option D is incorrect because an increase in government spending does not always lead to an increase in tax revenues.

The Crowding Out Effect of Fiscal Policy Refers To