If an increase in government spending of $100 million causes an increase in aggregate spending of less than $100 million,we call this phenomenon:
A) crowding in.
B) crowding out.
C) the multiplier.
D) the Ricardian effect.

Question

Quizplus · Accepted Answer

Crowding out refers to the phenomenon where an increase in government spending leads to a decrease in private investment or consumption, and may result in a smaller than intended impact on overall aggregate spending. This can occur if the government's increased borrowing leads to higher interest rates, which in turn discourages private sector investment and consumption. If an increase in government spending of $100 million causes an increase in aggregate spending of less than $100 million, it suggests that some amount of crowding out is occurring.

If an Increase in Government Spending of $100 Million Causes