The crowding-out effect is
A) due to the upward slope of the SRAS when the economy is operating to the right of the LRAS curve.
B) due to the government being more powerful in the markets when there is an increase in government spending.
C) a situation in which expansionary fiscal policy leads to a decrease in planned spending in the private sector.
D) only relevant when an inflationary gap is present.

Question

Quizplus · Accepted Answer

The crowding-out effect refers to a decrease in planned spending in the private sector when the government increases its spending, thereby crowding out private investment. This occurs because the increase in government spending leads to an increase in interest rates, which makes borrowing more expensive for businesses and households, and thus leads to a decrease in their planned spending.

The Crowding-Out Effect Is