While increasing government spending stimulates the economy, it also leads to higher interest rates and reduced...

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Question

While increasing government spending stimulates the economy, it also leads to higher interest rates and reduced...

While increasing government spending stimulates the economy, it also leads to higher interest rates and reduced private investment.

True

False

business economics

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Answer 1

Answer #1

True.

When government increases spending, budget deficit rises, to finance which the government resorts to borrowing. Higher borrowing increases interest rate, which decreases private investment (and decreases aggregate demand to the extent investment falls). This is called Crowding out effect.

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Answer 2

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When government borrowing leads to higher interest rates, which can in turn reduce private investment, this...

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While increasing government spending stimulates the economy, it also leads to higher interest rates and reduced...

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Add Answer to: While increasing government spending stimulates the economy, it also leads to higher interest rates and reduced...

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While increasing government spending stimulates the economy, it also leads to higher interest rates and reduced...