The term crowding-out effect refers to
A)the reduction in aggregate supply that results when a monetary expansion causes the interest rate to decrease.
B)the reduction in aggregate demand that results when a monetary expansion causes the interest rate to decrease.
C)the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase.
D)the reduction in aggregate demand that results when a decrease in government spending or an increase in taxes causes the interest rate to increase.

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when increased government spending leads to higher interest rates, which then reduces private investment and consumption, thus decreasing aggregate demand.

The Term Crowding-Out Effect Refers to