Question

Suppose that in an effort to shift the aggregate demand curve to the right, the government increases spending without changing taxes, thereby increasing real GDP. To the extent that increased government borrowing causes interest rates to , the increase in aggregate demand will be than policymakers expected when formulating the magnitude of their fiscal stimulus. This is known as the effect.

Answer 1

Answer:

Crowding Out Effect

Explanation:

Increasing government lending raises rate of interest, as investors become uncertain about the capacity of government to repay, therefore government needs to present higher interest rates.

A rise in government debt which holds taxes stagnant continues to crowd out private spending which dampens the beneficial effects of increased government spending on Aggregate Demand. The rise in Aggregate Demand is likely to be less than anticipated by policymakers.

rise, less, out