The crowding-out effect is
A)due to the upward slope of the SRAS when the economy is operating to the right of the LRAS curve.
B)due to the government being more powerful in the markets when there is an increase in government spending.
C)a situation in which expansionary fiscal policy leads to a decrease in planned real investment or planned real consumption in the private sector.
D)only relevant when an inflationary gap is present.

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when expansionary fiscal policy, such as an increase in government spending, leads to a decrease in planned real investment or planned real consumption in the private sector. This happens because the increase in government spending can lead to higher interest rates, which in turn can discourage private sector investment and consumption. The crowding-out effect is not limited to situations with an inflationary gap and is not related to the upward slope of the SRAS. The government being more powerful in the markets is not a relevant factor in the crowding-out effect.

The Crowding-Out Effect Is