The crowding-out effect is
A) the tendency of contractionary fiscal policy to cause an increase in planned investment or planned consumption in the private sector.
B) the tendency of expansionary fiscal policy to cause an increase in planned investment but not in planned consumption in the private sector.
C) the tendency of expansionary fiscal policy to cause a decrease in planned investment or planned consumption in the private sector.
D) the tendency of contractionary fiscal policy to cause an increase in planned investment but a decrease in planned consumption in the private sector.

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when the government increases its spending, or reduces taxes, stimulating economic activity, but then reduces private sector activity due to a decrease in private investment or consumption as interest rates rise. This happens because the increase in government spending creates more demand for credit, which drives up interest rates, making it more expensive for private businesses and individuals to borrow, thereby discouraging investment and consumption. Therefore, expansionary fiscal policy will cause a decrease in planned investment or planned consumption in the private sector due to the crowding-out effect.

The Crowding-Out Effect Is