Question

How can expansionary​ expenditure-based fiscal policy lead to crowding out in the​ economy? A. ​Expenditure-based fiscal policy increases the national​ debt, inducing​ forward-looking households and firms to reduce expenditures in anticipation of having to pay higher future taxes. B. ​Expenditure-based fiscal policy requires the collection of additional​ taxes, which reduce household incomes and expenditures. C. ​Expenditure-based fiscal policy leads to more government​ borrowing, absorbing funds that would have otherwise been borrowed and expended by the private sector. D. ​Expenditure-based fiscal policy raises inflation expectations and interest​ rates, causing private sector expenditures to fall.

Answer 1

The answer in this case, would be option C. or Expenditure-based fiscal policy leads to more government​ borrowing, absorbing funds that would have otherwise been borrowed and expended by the private sector.

Step-by-step explanation:

• In Macroeconomics, expansionary is a phenomenon which refers to increased government or public spending or expenditure in the economy.
• Now,crowding out effect can occur in the economy when the government attempts to liquidate or finace the increased expenditure through financial borrowing to such an extent that it leads to crowding out or shortage of most of funds to be expended by the private sector in the economy.
• This can essentially lead to shortage of funds which could have been borrowed by private businesses, companies and investors to raise private business and capital expenditure.