The crowding-out effect suggests that
A) restrictive fiscal policy is an effective weapon against inflation.
B) expansionary fiscal policy will be a highly effective weapon for fighting a recessionary downturn
C) a budget surplus will cause the demand for loanable funds to decline, interest rates to rise, and aggregate demand to decrease.
D) budget deficits that lead to higher interest rates reduce private investment spending.

Question

Quizplus · Accepted Answer

The crowding-out effect suggests that budget deficits, which lead to higher interest rates, reduce private investment spending. This is because the government is competing with private borrowers for a limited pool of loanable funds, causing interest rates to rise and making it more expensive for private borrowers to borrow money for investment. As a result, private investment spending decreases, which can offset any stimulative effect that expansionary fiscal policy might have had on the economy.

The Crowding-Out Effect Suggests That