If the economy is operating at capacity, an increase in government spending will ________ investment.
A) minimally crowd out
B) partially crowd out
C) completely crowd out
D) have no crowding-out effect on

Question

Quizplus · Accepted Answer

If the economy is operating at capacity, there is no room for an increase in overall spending without causing inflation. Therefore, any increase in government spending would have to be financed by borrowing or printing money, both of which could lead to an increase in interest rates and a decrease in private investment. This is known as complete crowding out.

If the Economy Is Operating at Capacity, an Increase in Government