The tendency for expansionary fiscal policy to cause a reduction in planned real investment spending by the private sector is called
A)the indirect effect.
B)the interest rate effect.
C)the crowding-out effect.
D)the Laffer effect.

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when government spending increases, which leads to an increase in interest rates, causing a reduction in planned investment spending by the private sector. This happens because higher interest rates make borrowing more expensive, making it harder for businesses to fund their investment projects.

The Tendency for Expansionary Fiscal Policy to Cause a Reduction