If the economy is on the steep portion of the AS curve and taxes decrease, ________ crowds out ________.
A) consumption; planned investment
B) government spending; planned investment
C) planned investment; consumption
D) planned investment; government spending

Question

Quizplus · Accepted Answer

When the economy is on the steep portion of the Aggregate Supply (AS) curve and taxes decrease, disposable income increases, leading to higher consumption. This increased demand can push interest rates up, making borrowing more expensive for businesses. As a result, planned investment may be crowded out due to the higher cost of financing, not because of increased government spending or a direct reduction in consumption or government spending.

If the Economy Is on the Steep Portion of the AS Curve