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4 December, 16:47

The crowding-out effect works through interest rates to: 
A. Increase the effectiveness of expansionary fiscal policy
B. Decrease the effectiveness of expansionary fiscal policy
C. Decrease the effectiveness of contractionary fiscal policy
D. Increase the effectiveness of contractionary fiscal policy

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Answers (1)
  1. 4 December, 16:49
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    Answer: Option (B) is correct.

    Explanation:

    Suppose there is an increase in the government spending which means that it is a expansionary fiscal policy, this will also results in an increase in the government borrowings. Now, this increase in the government borrowings will increase demand for the loanable funds, as a result interest rate increases. This rise in the interest rate will lead to a reduction in investment spending.

    Hence, the government spending crowding out the investment spending. Therefore, crowding out reduces the effect of expansionary fiscal policy.
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Home » Business » The crowding-out effect works through interest rates to: 
A. Increase the effectiveness of expansionary fiscal policy
B. Decrease the effectiveness of expansionary fiscal policy
C. Decrease the effectiveness of contractionary fiscal policy
D.
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