Question

As a result of crowding outLOADING... in the short​ run, the effect on real GDP of an increase in government spending is often A. equal to the increase in government spending. B. less than the increase in government spending. C. unrelated to the increase in government spending. D. more than the increase in government spending.

Answer 1

The answer in this case, would be option B. or less than the increase in government spending.

Step-by-step explanation:

• In Macroeconomics, crowding out refers to a macroeconomic situation in which the increase in government spending or expenditure reduces the private business or capital expenditure and consumption of goods and services.
• Crowding out mostly occurs when government increases financial borrowing or increases tax to finance or liquidate the public or government spending or expenditure in the economy.
• As the government borrowing and public tax increases, the interest rate in the economy increases which discourages the firms,companies or business organizations to avail business or capital loans and investments and reduces the consumption level of goods and services by individual households in the economy.
• Therefore,despite an increase in government spending or expenditure,further reductions in both private business investment and the aggregate consumption in the economy leads to a lesser increase in real GDP compared to the initial government spending.