Which of the Following Correctly Explains the Crowding-Out Effect

question 169

Multiple Choice

Which of the following correctly explains the crowding-out effect?

• A)An increase in government expenditures decreases the interest rate and so increases investment spending.
• B)An increase in government expenditures increases the interest rate and so reduces investment spending.
• C)A decrease in government expenditures increases the interest rate and so increases investment spending.
• D)A decrease in government expenditures decreases the interest rate and so reduces investment spending.

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Definitions:

Outsourcing

The practice of contracting out certain business functions or processes to a third-party provider.

Fixed Cost

Fixed cost refers to expenses that do not vary with the level of production or sales, such as rent, salaries, and insurance.

Sunk Cost

Expenditures that have already been incurred and cannot be recovered, which should not affect future decision-making.

Opportunity Cost

Represents the benefit that is missed or given up when an investor, individual, or business chooses one alternative over another.