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3 February, 17:19

The crowding out effect will be greater than

A) less sensitive investment is to changes in interest rates.

B) more sensitive investment is to changes in interest rates.

C) less sensitive consumption and net exports are to changes in interest rates.

D) more sensitive consumption and net exports are to changes in interest rates.

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Answers (1)
  1. 3 February, 17:21
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    The correct answer to the following question is option B).

    Explanation:

    Crowding effect refers to a situation where due to the increase in interest, there is a decrease in investment (private investment spending), which in turn leads to decrease in initial increase in investment. Here the interest rate have increased because of the expansionary fiscal policy implemented by the government, where they have increased their spending. A high magnitude of crowding effect can lead to decrease in the money supply in economy.
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