Multiple Select Question

Question

Select all that apply

All else equal, which of the following are potentially crowded out as a result of expansionary fiscal policy?
Multiple select question.

Government spending

Exports

Interest-sensitive consumption

Investment

Answer 1

In the context of expansionary fiscal policy, which typically involves increasing government spending or cutting taxes in order to stimulate economic activity, several components of the economy can be impacted. Here is a breakdown of the potential effects:

1. Government spending - Not crowded out: Expansionary fiscal policy itself involves increasing government spending, so it doesn't get crowded out by that very same policy.

2. Exports - Potentially crowded out: If expansionary fiscal policy leads to higher interest rates or a stronger domestic currency, this could make exports more expensive for foreign buyers, potentially reducing export levels.

3. Interest-sensitive consumption - Potentially crowded out: If expansionary fiscal policy results in higher interest rates (due to increased government borrowing), it can dampen interest-sensitive consumption, such as purchases of homes and automobiles, as borrowing costs rise.

4. Investment - Potentially crowded out: Similar to interest-sensitive consumption, if expansionary fiscal policy leads to higher interest rates, it can crowd out private investment, as the cost of borrowing becomes more expensive.

Based on this analysis, the options that are potentially crowded out as a result of expansionary fiscal policy would be:

• Exports
• Interest-sensitive consumption
• Investment

So the correct selections are:

• Exports
• Interest-sensitive consumption
• Investment