For crowding out to occur in the long run, an increase in government spending must cause the money demand curve to _______ in order to _______ the interest rate.
A) downwards; decrease
B) downwards; have no effect
C) upwards; increase
D) upwards; have no effect

Question

Quizplus · Accepted Answer

Crowding out occurs when government spending increases, causing an increase in demand for money, which leads to an increase in the interest rate, reducing private investment. In the long run, if the money demand curve shifts upwards (to the right), then the interest rate will increase further, leading to more crowding out. Therefore, the correct answer is C: upwards; increase.

For Crowding Out to Occur in the Long Run, an Increase