Which statement describes the effect of crowding out?
A) Consumption and investment are indirectly affected by changes in government spending.
B) Consumption is directly affected by changes in government spending.
C) Consumption and investment are directly affected by changes in government spending.
D) Consumption and investment are not affected by changes in government spending.

Question

Quizplus · Accepted Answer

Crowding out occurs when increased government spending leads to higher interest rates, which then reduces private investment. The effect on consumption and investment is indirect, as the primary mechanism is through changes in interest rates rather than direct changes in government spending.

Which Statement Describes the Effect of Crowding Out