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.

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Definitions:

Foreign Portfolio Investment

Investment in financial assets from another country, such as stocks or bonds, that does not grant the investor control over the business entities in which the investment is made.

U.S. Government Bonds

Securities issued by the United States Department of the Treasury to finance government spending.

Net Capital Outflow

The difference between a nation's savings and its domestic investments, representing international transfers of capital.

U.S. Assets

Assets located within the United States that may include real estate, stocks, bonds, and other financial instruments owned by individuals, companies, or the government.