If crowding out occurs in the long run and the government increases spending for non- investment projects such as defense, then the additional government spending:
A) replaces a larger amount of private investment.
B) decreases total investment spending in the economy.
C) replaces an equivalent amount of private non- investment.
D) enhances private investment by the same amount.

Question

Quizplus · Accepted Answer

Crowding out occurs when government borrowing to finance its spending leads to an increase in interest rates, which in turn reduces private investment spending. Since the question states that the government is increasing spending for non-investment projects such as defense, it is likely that this spending will be financed through borrowing. Therefore, the increase in government spending will lead to an increase in interest rates, which will reduce private investment spending in the long run. Therefore, choice B is the correct answer.

If Crowding Out Occurs in the Long Run and the Government