What may offset the crowding-out effect of deficit spending?

Question

Multiple choice question.

Improved prospects that firms might expect from a fiscal stimulus

Falling interest rates from a fiscal stimulus

Rising interest rates from a fiscal stimulus

Worsening prospects for firms as a result of a fiscal stimulus

Answer 1

The correct answer is:

Improved prospects that firms might expect from a fiscal stimulus

This option suggests that if firms anticipate positive outcomes from increased government spending (such as increased demand for goods and services), it can offset the crowding-out effect, where government borrowing leads to higher interest rates and reduced private investment.