Which of the following is an example of crowding out? a. A decrease in the rate of growth of the stock of money decreases GDP. b. A deficit causes an increase in interest rates, which causes a decrease in investment spending. c. An increase in tariffs causes a decrease in imports. d. A decrease in government housing subsidies causes an increase in private spending on housing.

Question

Business

Callum Clayton

12 November, 02:30

Which of the following is an example of crowding out? a. A decrease in the rate of growth of the stock of money decreases GDP. b. A deficit causes an increase in interest rates, which causes a decrease in investment spending. c. An increase in tariffs causes a decrease in imports. d. A decrease in government housing subsidies causes an increase in private spending on housing.

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Maddison Irwin · Answer 1

B

Explanation:

A situation when there is an increased interest rate it always leads to a decrease in private investment spending such that it dampens the initial increase of total investment spending is called crowding out effect.

Sometimes, government takes on an expansionary fiscal policy stance and increases its spending to ultimately boost the economic activity. This always leads to an increase in interest rates. Increased interest rates affect private investment decisions. A high magnitude of the crowding out effect may even lead to lesser income in the economy.