AP Macroeconomics Question 62: Answer and Explanation
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12. In order to reduce or eliminate crowding out, expansionary fiscal policy can be accompanied by
- A. an increase in government spending
- B. a decrease in investment
- C. expansionary monetary policy
- D. contractionary monetary policy
- E. an increase in the interest rate
Correct Answer: C
C Crowding out occurs when an increase in government spending (which constitutes expansionary fiscal policy) increases the interest rate and decreases investment. Thus, an increase in government spending, a decrease in investment, or an increase in the interest rate would all make the problem continue. Contractionary monetary policy would only increase the interest rate more, but expansionary monetary policy could relieve upward pressures on the interest rate and diminish the crowding out effect.