According to the Crowding-Out Effect, How Does a Decrease in Government

question 109

Multiple Choice

According to the crowding-out effect, how does a decrease in government spending affect the interest rate and investment spending?

• A) It increases the interest rate and so increases investment spending.
• B) It increases the interest rate and so decreases investment spending.
• C) It decreases the interest rate and so increases investment spending.
• D) It decreases the interest rate and so decreases investment spending.

---

Definitions:

Total Revenue

The total amount of money received by a company from its sales of goods or services, before any expenses are subtracted.

Profit

The financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity.

Economic Profits

Profits exceeding the total cost of capital, including both the cost of debt and the opportunity cost of equity capital.

Explicit Costs

Expenses directly incurred in the course of running a business, such as wages and materials.