If the government increases its spending,financing methods that can cause crowding out include:
A) raising taxes only.
B) selling bonds only.
C) both raising taxes and selling bonds.
D) neither raising taxes nor selling bonds.

Question

Quizplus · Accepted Answer

When the government increases its spending and simultaneously sells bonds, it can lead to individuals and companies investing their funds in buying government bonds instead of investing in private markets. This can cause a decrease in private investment and borrowing, known as crowding out. On the other hand, if the government only raises taxes to finance its spending, it can still lead to crowding out if the increased tax burden on individuals and companies reduces their disposable income and private investment. Therefore, the best choice is both raising taxes and selling bonds.

If the Government Increases Its Spending,financing Methods That Can Cause