'Crowding out' will be smaller if:
A)consumption spending is more sensitive to changes in the interest rate.
B)equilibrium GDP is further below potential GDP.
C)investment spending is less sensitive to changes in the interest rate.
D)the economy is at or above full employment.

Question

Quizplus · Accepted Answer

'Crowding out' occurs when an increase in government spending leads to a decrease in private investment spending. This is often caused by a rise in interest rates that occurs when the government borrows money to fund its spending. Option C suggests that investment spending is less sensitive to changes in interest rates. This means that a rise in interest rates may not affect investment spending as much, and thus, the 'crowding out' effect will be smaller.

'Crowding Out' Will Be Smaller If