Crowding out occurs when government:?

by

A- Deficits increase the interest rate; this reduces investment spending

B- Surpluses increase the interest rate’ this reduces investment spending

C- Deficits decrease the interest rate’ this reduces investment spending

D- Surpluses decrease the interest rate’ this reduces investment spending

1 Answer

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  • Its going to be A

    (T-G) < 0 will imply a greater expenditure into the economy, leading to short term increase in interest rate crowding out domestic investment.

    In the long run though, a price increase reduces real wages and an increase in nominal compensation to workers will further increase inflation rates and further reduce investment while output returns back to original or conventional level.

    Source(s): mind

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