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 transfer payments.
B)net exports and investment will tend to move in the opposite direction from a change in transfer payments.
C)net exports will tend to move in the same direction as a change in transfer payments and investment will tend to move in the opposite direction.
D)net exports will tend to move in the opposite direction from a change in transfer payments and investment will tend to move in the same direction.

Question

Quizplus · Accepted Answer

Crowding-out effects refer to the reduction in private investment that occurs when government borrows more money, leading to higher interest rates. When transfer payments increase, government spending also increases, leading to a higher demand for funds and higher interest rates. Higher interest rates discourage private investment, causing it to decrease. This leads to a decrease in net exports as well, as a decrease in investment usually results in a slower economy and less demand for imports. Therefore, net exports and investment will tend to move in the opposite direction from a change in transfer payments.

Due to Crowding-Out Effects, Other Things Being Equal