Due to crowding-out effects, other things being equal:
A)net exports and investment will tend to move in the same direction as a change in government purchases.
B)net exports and investment will tend to move in the opposite direction from a change in government purchases.
C)net exports will tend to move in the same direction as a change in government purchases and investment will tend to move in the opposite direction.
D)net exports will tend to move in the opposite direction as a change in government purchases and investment will tend to move in the same direction.

Question

Quizplus · Accepted Answer

Crowding-out effects occur when government spending increases, causing interest rates to rise, which in turn reduces private investment. As a result, a change in government purchases will tend to reduce investment. Since investment and net exports tend to be positively related, a reduction in investment will cause net exports to increase, resulting in them moving in the opposite direction from a change in government purchases. Therefore, option B is correct.

Due to Crowding-Out Effects, Other Things Being Equal