The crowding out effect is caused by
A)an increase in the money supply, which increases the demand for goods and services, and thus crowds out investment.
B)an increase in government purchases, which reduces the demand for goods and services, and thus crowds out investment.
C)an increase in consumer income, which increases the demand for goods and services, and thus crowds out investment.
D)an increase in government purchases, which increases the demand for goods and services, and thus crowds out investment.

Question

Quizplus · Accepted Answer

The crowding out effect is caused by an increase in government purchases, which increases the demand for goods and services, and thus crowds out investment. This is because when the government spends more money on goods and services, it creates a higher demand for these products, which can lead to an increase in prices. As a result, other buyers may be priced out of the market, including investors who may have wanted to invest in capital goods. This decrease in investment can lead to a decrease in long-term economic growth.

The Crowding Out Effect Is Caused by