The crowding-out effect of expansionary fiscal policy suggests that

Question

Multiple Choice
tax increases are paid primarily out of saving and therefore are not an effective fiscal device.
increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.
it is very difficult to have excessive aggregate spending in the U.S. economy.
consumer and investment spending always vary inversely.

Answer 1

The correct option is:

increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.

This describes the crowding-out effect, which posits that when the government increases spending and finances it through borrowing, it can lead to higher interest rates. These higher interest rates make borrowing more expensive for businesses and consumers, potentially leading to a reduction in private investment.