Question

Crowding out a. occurs when rising interest rates cause cuts in consumption and investment spending. b. is one reason fiscal policy is so effective. C. occurs when rising interest rates cause cuts in government spending. d. occurs when interest rates fall due to government borrowing.

Answer 1

Crowding out occurs when government borrowing and spending lead to higher interest rates, which discourage private investment and spending, potentially offsetting the stimulative effects of expansionary fiscal policy.

Step-by-step explanation:

The concept of crowding out refers to a situation where government borrowing and spending lead to higher interest rates, which in turn discourage firms and households from borrowing. It is a counterintuitive effect of expansionary fiscal policy, where an attempt to stimulate the economy through government action actually results in reduced private sector economic activity. This occurs because the higher interest rates make loans more expensive, which reduces the willingness of businesses to invest and consumers to spend, potentially offsetting the intended stimulative effects of the policy.