The reduction in investment demand that results when an expansionary fiscal policy raises the real interest rate is called the:
A) multiplier effect.
B) accelerator effect.
C) crowding- out effect.
D) Ricardian effect.

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when an expansionary fiscal policy, such as increased government spending, leads to higher demand for loanable funds and thereby raises the real interest rate. This increase in the real interest rate then reduces investment demand, as it becomes more expensive for firms to borrow money to invest, resulting in a decrease in private investment.

The Reduction in Investment Demand That Results When an Expansionary