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Crowding out occurs when government borrowing increases the demand for loanable funds, raising real interest rates and reducing private investment spending. This limits the effectiveness of expansionary fiscal policy in stimulating long-run growth.
Ultimate Flashcard Review
Video
The Crowding Out Effect
Key Concepts to Understand
Question 1 of 3
Which of the following will move the federal government budget towards a deficit?
Expansionary monetary policy
Expansionary fiscal policy
Contractionary fiscal policy
Contractionary monetary policy
Practice Questions: Test Your Understanding
Apply what you've learned with these practice questions. These questions test your understanding of the key concepts.
Question 1 of 3
If the government pursues expansionary fiscal policy while the central bank holds the money supply constant (or uses limited reserves tools), what is the likely impact on real interest rates and private investment?
Real interest rates decrease, Private investment increases
Real interest rates increase, Private investment decreases
Real interest rates decrease, Private investment decreases
Real interest rates increase, Private investment increases
No change in real interest rates or private investment
Key Takeaways
- 📊Master the fundamentals: Understanding these core concepts is essential for success in AP Economics.
- ✅Practice makes perfect: Use the interactive exercises and practice questions to reinforce your understanding.