A(n)________ in private expenditure as a result of a(n)________ in government purchases is called crowding out.
A) increase; decrease
B) decrease; decrease
C) decrease; increase
D) increase; increase

Question

Quizplus · Accepted Answer

Crowding out occurs when an increase in government spending leads to a decrease in private expenditure. This is because government spending is financed by borrowing, which leads to an increase in interest rates. As interest rates rise, the cost of borrowing increases, which reduces private investment and consumption. Therefore, an increase in government purchases leads to a decrease in private expenditure.

A(n)________ in Private Expenditure as a Result of A(n)________ in Government

A(n) in Private Expenditure as a Result of A(n) in Government