The crowding-out effect is
A)the tendency of contractionary fiscal policy to cause an increase in planned investment or planned consumption in the U.S. private sector.
B)the tendency of expansionary fiscal policy to cause an increase in planned investment but not in planned consumption in the U.S. private sector.
C)the tendency of expansionary fiscal policy to cause a decrease in planned investment or planned consumption in the U.S. private sector.
D)the tendency of contractionary fiscal policy to cause an increase in planned investment but a decrease in planned consumption in the U.S. private sector.

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when expansionary fiscal policy, such as an increase in government spending or a decrease in taxes, leads to a decrease in planned investment or planned consumption in the private sector. This happens because the increased government borrowing to finance the policy crowds out private investment, as there is less money available for private businesses and consumers to borrow. Therefore, choice C is the correct answer.

The Crowding-Out Effect Is