The crowding-out effect refers to the tendency of expansionary fiscal policy to
A) cause decreases in planned expenditures in the private sector.
B) cause households to save less.
C) replace low-skilled labor with higher-skilled labor.
D) cause firms to produce above their full capacity.

Question

Quizplus · Accepted Answer

Expansionary fiscal policy, which involves increased government spending and/or decreased taxes, can lead to higher interest rates and inflation, which in turn can discourage private sector investments and planned expenditures. This can result in less demand for goods and services and may offset some of the intended effects of the fiscal policy. This is known as the crowding-out effect.

The Crowding-Out Effect Refers to the Tendency of Expansionary Fiscal