Which of the Following Best Describes the Crowding-Out Effect

question 32

Multiple Choice

Which of the following best describes the crowding-out effect?

• A) An increase in government expenditures will cause taxes to rise, which will reduce both aggregate demand and output.
• B) An increase in borrowing by the government will push interest rates upward, which will lead to a reduction in private spending.
• C) An increase in borrowing by the government will decrease the money supply and, thereby, reduce aggregate demand.
• D) An increase in government expenditures will cause the general level of prices to fall and, thereby, reduce aggregate demand and output.

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Definitions:

Mandatory

Something that is required or obligatory by law or rules.

Chilling Effect

A chilling effect occurs when the exercise of rights or freedoms is discouraged by the threat of legal sanction or other negative consequences, leading to self-censorship or avoidance of certain actions.

Arbitration

A method of dispute resolution where an impartial third party, the arbitrator, makes a binding decision to resolve a dispute outside of court.

Contract Disputes

Conflicts that arise over the interpretation, fulfillment, or breach of a contract between two or more parties.