In the extreme case of a complete crowding-out effect
A) an increase in interest rates will stimulate investment spending.
B) an increase in tax rates will stimulate work effort.
C) an increase in government spending will not increase aggregate demand.
D) an increase in government spending will stimulate investment spending.

Question

Quizplus · Accepted Answer

In the extreme case of a complete crowding-out effect, an increase in government spending will not increase aggregate demand. This is because the increase in government spending is offset by a decrease in private spending resulting from higher interest rates that arise due to the government's increased demand for borrowing. Therefore, the net effect on aggregate demand is zero.

In the Extreme Case of a Complete Crowding-Out Effect