Chapter 36, Problem 6MCQ

To determine

The correct option when the Crowding out is less likely to be the output or result of expansionary fiscal policy

Answer to Problem 6MCQ

From the available options, the correct option is a period of consensus building among economists.

Explanation of Solution

According to this effect of expansionary fiscal policy, government expenditure may rise at the expense of private investment which means interest rates will rise as a result of increased borrowing by the government, which will deter investment. It means in Crowding out effect would high in the expansionary fiscal policy when the government debt would large, interest rates would high, investments would low, and the economy is facing inflation or high prices of goods even though the economy expanded due to large spending of government.

Therefore, the correct option is e (interest rates are low) and all other options are incorrect because this effect is more likely to be the output of expansionary fiscal policy when interest rates would high.

Economics Concept Introduction

Introduction: When government borrowing on the money market results in an increase in interest rates then the Crowding out effect will arise.