Question

Expansionary fiscal policy that creates a budget deficit can lead to crowding out. This crowding out effect is exhibited by A. increased taxes and increased investment. B. increased government expenditures and decreased interest rates. C. increased government expenditures and decreased investment. D. decreased government expenditures and decreased investment.

Answer 1

Answer: C. increased government expenditures and decreased investment.

Step-by-step explanation:

Crowding out refers to a scenario where the Government borrows so much from loanable fund sources that there is little left for the private sector to borrow which leads to higher interest rates that they would be unable to borrow at.

This is reflected by the government being able to spend the money they borrowed leading to increased government expenditure but investment spending will decrease because the private sector was unable to secure loans to do so.