Assume that if there were no crowding out, an increase in government spending would increase GDP by $100 billion. If there had been partial crowding out, however, then GDP would have
A) increased by more than $100 billion.
B) increased by less than $100 billion.
C) increased by $100 billion.
D) not increased.

Question

Quizplus · Accepted Answer

If there is partial crowding out, it means that the increase in government spending would lead to a decrease in private investment, as interest rates rise due to increased demand for borrowing. This decrease in private investment would partially offset the increase in government spending, resulting in a smaller increase in GDP than $100 billion. Therefore, GDP would increase by less than $100 billion.

Assume That If There Were No Crowding Out, an Increase