The magnitude of the crowding out effect depends on which of the following? A. The interest sensitivity…
Crowding out depends on both the interest sensitivity of private spending and the rise in interest rates caused by higher government spending. For a given interest-rate…
Choose your answer
The magnitude of the crowding out effect depends on which of the following?
A. The interest sensitivity of private sector spending
B. The increase in the interest rate due to the increase in government spending
Answer and explanation
Correct answer C
Crowding out depends on both the interest sensitivity of private spending and the rise in interest rates caused by higher government spending. For a given interest-rate increase, greater sensitivity means a larger reduction in private spending.
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Kerala SET (LBS Centre)