Which of the following terms refers to the reduction in demand that results when a fiscal expansion raises the interest rate?
A)the multiplier effect
B)the crowding-out effect
C)the accelerator effect
D)the Ricardian equivalence effect

Question

Quizplus · Accepted Answer

The reduction in demand that results when a fiscal expansion raises the interest rate is known as the crowding-out effect. This occurs because the increase in government spending leads to an increase in demand for loanable funds, which drives up interest rates and crowds out private investment. This, in turn, reduces overall demand in the economy. The multiplier effect refers to the increase in output that results from an initial increase in spending, the accelerator effect refers to the relationship between investment and output growth, and the Ricardian equivalence effect suggests that consumers will adjust their saving and spending behavior in response to changes in government debt.

Which of the Following Terms Refers to the Reduction in Demand