What does crowding out lead to?
i.A smaller effect of a countercyclical fiscal policy
ii.Higher investment expenditures
A) i) and ii) are both true
B) i) and ii) are both false
C) i) is true and ii) is false
D) i) is false and ii) is true

Question

Quizplus · Accepted Answer

Crowding out refers to the phenomenon where an increase in public investment expenditure leads to a decrease in private investment expenditure. This decrease in private investment, in turn, leads to a smaller effect of countercyclical fiscal policy as private investment is a key driver of economic growth, and a reduction in private investment can slow down the pace of economic growth. Thus, only statement i) is true. Statement ii) is false as crowding out leads to lower, not higher, investment expenditures.

What Does Crowding Out Lead To