If the economy is on the steep portion of the AS curve,
A) there is little crowding out of planned investment.
B) there is almost complete crowding out of planned investment.
C) consumption, but not government spending, crowds out planned investment.
D) government spending, but not consumption, crowds out planned investment.

Question

Quizplus · Accepted Answer

On the steep portion of the AS curve, the economy is operating at or near its full potential output. This leads to increased demand for resources such as labor and capital, which drives up their prices. As a result, interest rates also rise, making it more expensive for firms to borrow money for investment. This decrease in planned investment due to higher interest rates is called crowding out. In this situation, there is almost complete crowding out of planned investment as interest rates have risen to a level where firms cannot afford to invest in new projects.

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