The crowding-out effect refers to the tendency of expansionary fiscal policy to
A)cause decreases in planned investment or planned consumption.
B)cause households to save less.
C)replace low-skilled labor with higher-skilled labor.
D)cause firms to produce beyond capacity.

Question

Quizplus · Accepted Answer

Expansionary fiscal policy, which involves an increase in government spending and/or a decrease in taxes, can lead to higher interest rates as demand for credit increases. This makes borrowing more expensive for firms and households, which can lead to decreases in planned investment or planned consumption. This is known as the crowding-out effect.

The Crowding-Out Effect Refers to the Tendency of Expansionary Fiscal