The United States is experiencing a recession and Congress decides to adopt an expansionary fiscal policy to stimulate the economy. In this case, the crowding-out effect suggests that investment spending would:

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when increased government spending leads to a decrease in private sector investment. This happens because the government's increased demand for money leads to higher interest rates, which makes borrowing more expensive for private businesses. Therefore, investment spending would decrease, partially offsetting the effects of the expansionary fiscal policy.

The United States Is Experiencing a Recession and Congress Decides