Some economists argue that because increases in government spending crowd out pr

Question

Some economists argue that because increases in government spending crowd out private spending, increased government spending will reduce the long-run growth rate of real GDP.

1) This is most likely to happen if the private spending being crowded out is: (Consumption spending / Investment Spending / Net Exports)

2) In terms of its effect on the long-run growth rate of real GDP, it is likely to matter more if the additional government spending involves

A. increased spending on highways and bridges.

B. increased spending on the national parks.

C. both would have the same impact on long-run growth in real GDP.

D. neither matters to long-run growth in real GDP.

Explanation / Answer

1>  Investment Spending

Reason

Crowding out occurs if due to the higher level of government investment. the private investment decrease. This is called crowding out.

2>A. increased spending on highways and bridges.

Increased spending on highways and bridges may aid economic growth, whereas increased spending on national parks is unlikely to.

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