Question

Suppose that government purchases rise by $100 billion and together consumption and investment decline by a total of $80 billion. This is an example of

Answer 1

Answer: Incomplete crowding out

Step-by-step explanation:

Crowding out in an economy occurs when spending by the Government causes a reduction in private spending and consumption. This is usually as a result of the Government borrowing money that causes interest rates on loans to rise thereby making it expensive for firms and individuals to borrow at the higher rates.

When the amount of Government spending is exactly equal to the reduction in Investment and consumption, this is a Complete Crowding out. When the reduction is only partial as is the case here, the process is known as an Incomplete Crowding out.