The crowding-out effect refers to the possibility that
A) when used simultaneously, expansionary ﬁscal and monetary policies are counterproductive.
B) the asset demand for money varies inversely with the interest rate.
C) deﬁcit ﬁnancing will increase the interest rate and reduce investment.
D) an increase in the supply of money will result in a decline in velocity.

Question

Quizplus · Accepted Answer

The crowding-out effect refers to the possibility that government borrowing (or deficit financing) will increase the interest rate and reduce investment by the private sector, as they compete for a limited pool of savings. This can result in lower economic growth and offset the expansionary effects of government spending. Option A refers to the idea of "policy mix" and is not directly related to the crowding-out effect. Option B is related to the demand for money, but not the effect of government spending. Option D refers to the quantity theory of money and is also not directly related to the crowding-out effect.

The Crowding-Out Effect Refers to the Possibility That