The "crowding out" effect occurs when:
A) fiscal policy is expansionary while the money supply remains unchanged.
B) private investment spending exceeds government spending.
C) private investment spending replaces government spending.
D) currency in circulation crowds out demand deposits.

Question

Quizplus · Accepted Answer

The "crowding out" effect refers to a situation where increased government spending leads to a reduction in private sector investment. This typically happens because the government borrows money (by issuing bonds) to finance its spending, which increases interest rates. Higher interest rates make borrowing more expensive for businesses and individuals, which can reduce the amount of private investment. This scenario is most accurately described when fiscal policy is expansionary (i.e., increased government spending or decreased taxes) while the money supply remains unchanged, as in option A.

The "Crowding Out" Effect Occurs When