Suppose the United States pursued an expansionary fiscal policy to stimulate its

Question

Suppose the United States pursued an expansionary fiscal policy to stimulate its economy and eliminate a recession. The crowding-out effect suggests that: A) private investment would decrease, thus increasing aggregate demand and partially offsetting the fiscal policy. B) private investment would decrease, thus decreasing aggregate demand and partially offsetting the fiscal policy. C) net exports would increase, thus decreasing aggregate demand and partially offsetting fiscal policy. D) net exports would increase, thus increasing aggregate demand and partially reinforcing the fiscal policy.

Explanation / Answer

Suppose the United States pursued an expansionary fiscal policy to stimulate its economy and eliminate a recession. The crowding-out effect suggests that: A) private investment would decrease, thus increasing aggregate demand and partially offsetting the fiscal policy. B) private investment would decrease, thus decreasing aggregate demand and partially offsetting the fiscal policy. because crowding out "occurs when Expansionary Fiscal Policy causes interest rates to rise, thereby reducing private spending. That means increase in government spending crowds out investment spending." (Source: Economics Dictionary for Encyclopedia Britannica) C) net exports would increase, thus decreasing aggregate demand and partially offsetting fiscal policy. D) net exports would increase, thus increasing aggregate demand and partially reinforcing the fiscal policy.

Correct answer: B

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