Expansionary fiscal policy fails to achieve the government's national economic goals. Some economists claim it is due to indirect crowding out. What evidence would be consistent with this claim?

Question

Quizplus · Accepted Answer

Indirect crowding out occurs when an expansionary fiscal policy increases the demand for loanable funds, causing interest rates to rise. This may discourage private investment and reduce net exports (if domestic assets become more attractive, the exchange rate appreciates, making exports more expensive). Therefore, an increase in interest rates would be consistent with this claim. Choices A and C would indicate that the policy was successful in stimulating the economy, while choice D suggests deflationary pressures.

Expansionary Fiscal Policy Fails to Achieve the Government's National Economic