Complete "crowding-out" describes the situation in the economy when
A)fiscal policy is effective in changing output.
B)the shift in the LM curve by monetary policy is "impotent."
C)the shift in the IS curve by fiscal policy is "impotent."
D)fiscal policy crowds out monetary policy.

Question

Quizplus · Accepted Answer

Complete "crowding-out" refers to a situation where increased government spending leads to a decrease in private investment. This happens because the government borrowing to finance its spending leads to higher interest rates, which in turn makes borrowing more expensive for the private sector. This is effectively described by the shift in the IS curve by fiscal policy being "impotent," as the increase in government spending does not lead to an increase in overall demand due to the decrease in private investment.

Complete "Crowding-Out" Describes the Situation in the Economy When