Because of crowding out
A) expansionary fiscal policy during a recession must involve a tax increase.
B) expansionary fiscal policy during a recession is reinforced by private investment spending.
C) the effect of expansionary fiscal policy is partially offset by the decline in investment spending caused by higher interest rates.
D) expansionary fiscal policy is completely achieved even with a decline in investment spending.

Question

Quizplus · Accepted Answer

Crowding out refers to the decline in private investment spending due to higher interest rates caused by government borrowing to finance its own spending. Therefore, expansionary fiscal policy may still have some positive effect on the economy, but it will be partially offset by the decline in investment spending. Option A is incorrect because a tax increase would have a contractionary effect rather than an expansionary effect. Option B is incorrect because private investment spending may not necessarily increase in response to expansionary fiscal policy. Option D is incorrect because the decline in investment spending would reduce the overall impact of expansionary fiscal policy.

Because of Crowding Out