The crowding-out effect of expansionary ﬁscal policy suggests that
A) tax increases are paid primarily out of saving and therefore are not an effective ﬁscal device.
B) increases in government spending ﬁnanced through borrowing will increase the interest rate and thereby reduce investment.
C) it is very diﬃcult to have excessive aggregate spending in the U.S. economy.
D) consumer and investment spending always vary inversely.

Question

Quizplus · Accepted Answer

The crowding-out effect suggests that when the government increases its spending and finances it through borrowing, it increases the demand for loanable funds, which then drives up the interest rates, making borrowing more expensive for private investors. As a result, private investment and consumption decrease, resulting in an overall reduction of aggregate demand. Therefore, option B is the correct answer to this question.

The Crowding-Out Effect of Expansionary ﬁScal Policy Suggests That