AP Macroeconomics Question 336: Answer and Explanation
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7. The "crowding-out" effect is the result of
- A. decreasing interest rates from contractionary fiscal policy.
- B. increasing interest rates from expansionary fiscal policy.
- C. increasing interest rates from expansionary monetary policy.
- D. increasing unemployment rates from expansionary monetary policy.
- E. a depreciating dollar versus other currencies.
Correct Answer: B
B-Expansionary fiscal policy, intended to boost aggregate demand, that requires borrowing increases interest rates and lessens private investment spending. The decrease in investment spending weakens the impact of expansionary fiscal policy.