Suppose that the government increases spending without changing its taxes in an effort to shift the aggregate demand curve to the right, thereby increasing real GDP. To the extent that increased government borrowing causes interest rates to rise, the increase in aggregate demand will be less than policymakers expected when formulating the magnitude of their fiscal stimulus. The situation described above is known as the crowding-in effect. Is this statement true or false

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Business

Joshua Coffey

5 August, 19:16

Suppose that the government increases spending without changing its taxes in an effort to shift the aggregate demand curve to the right, thereby increasing real GDP. To the extent that increased government borrowing causes interest rates to rise, the increase in aggregate demand will be less than policymakers expected when formulating the magnitude of their fiscal stimulus. The situation described above is known as the crowding-in effect. Is this statement true or false

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Moshe Moyer · Answer 1

Falsey

Explanation:

Because Increase in government borrowing increases interest rate, because creditors are unsure about government ability to repay so government needs to offer them Higher interest rate.

An increase in government borrowing holding taxes constant, tends to crowd out private spending dampening the positive effect of increased government spending on AD. The increase in AD will be less than policymakers expected. This is known as crowding out effect.