Question

To stimulate an economy that is highly susceptible to the crowding out effect, it would be...

To stimulate an economy that is highly susceptible to the crowding out effect, it would be more advisable to use:

A. government spending because this policy has a direct impact on economic activity.

B. tax cuts because this policy does not require borrowing which can push up interest rates.

C. tax cuts because this policy does not require borrowing which can push down interest rates.

D. government spending because this policy has an indirect impact on economic activity.

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Crowding out effect implies that an increase in borrowings by government results in an increase in interest rates which in result discourage businesses from borrowing and leads to a fall in investment spending by businesses.

So, if an economy is highly susceptible to the crowding out effect then, in that case, increased government borrowing will definitely leads to considerable decrease in investment spending by businesses which in result will reverse any impact that increase in government spending through borrowings will create.

Thus, it would be advisable for the government to use tax cuts because this policy does not require borrowing which can push up interest rates.

Hence, the correct answer is the option (B).

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
22. The crowding out effect is zero if A) the LM-curve is horizontal B) the LM-curve...
22. The crowding out effect is zero if A) the LM-curve is horizontal B) the LM-curve is vertical C) the Fed conducts open market sales following fiscal expansion D) income is stimulated via a tax cut rather than an increase in government spending E) none of the above 23. Crowding out occurs when A) an increase in defense spending causes a decrease in consumption B) expansionary monetary policy fails to stimulate economic growth C) expansionary fiscal policy causes interest rates...
Can monetary and fiscal policies complement each other? Suppose economic policymakers are attempting to stimulate a...
Can monetary and fiscal policies complement each other? Suppose economic policymakers are attempting to stimulate a recessionary economy by raising government spending and lowering taxes. What sort of monetary policy is likely to be appropriate? (Address the crowding out issue.)
A1)Which statement best describes quantitative easing? A)An approach routinely used by central banks to stimulate the...
A1)Which statement best describes quantitative easing? A)An approach routinely used by central banks to stimulate the economy. B)A policy aimed at restricting the money supply. C)A financial accounting tool used by government. D)An increase in the money supply by creating (printing) more of it. E)The point where an economic downturn becomes an economic upturn. __ A2)Supply side economic policy is based on 1)the Fed. 2)business regulation. 3)business tax cuts. 4)government spending programs.
If the federal government is reducing net taxes to stimulate the economy at the same time...
If the federal government is reducing net taxes to stimulate the economy at the same time the Fed is selling bonds in the open market, the effectiveness of the expansionary fiscal policy will be 1. increased, because the Fed's actions will result in higher interest rates. 2. reduced, because the Fed's actions will result in higher interest rates. 3. increased, because the Fed's actions will result in lower interest rates. 4. reduced, because the Fed's actions will result in lower...
1. Suppose the government plans to stimulate the economy in a specific year. One policy would...
1. Suppose the government plans to stimulate the economy in a specific year. One policy would cut taxes and government expenditures by the same amount: $50 billion. Another policy would give businesses a temporary investment tax credit of 15% on each productive investment project. Which policy would be more successful in stimulating the economy? Explain. 2. How does inventory investment (planned and unplanned) change during recessions and booms? Explain.
Crowding out refers to a situation in which _______. a an increase in the Fed Funds...
Crowding out refers to a situation in which _______. a an increase in the Fed Funds rate leads to lower financial frictions, thus stimulating aggregate demand and with it the economy. b an increase in government spending leads to additional consumption, thereby amplifying the total aggregate demand effect. c an increase in government spending leads to higher inflation and therefore higher interest rates, which in turn reduces consumption and investment expenditures. d increased competition across firms leads to more crowded...
Suppose a hypothetical economy is currently in a situation of deficient aggregate demand of $64 billion....
Suppose a hypothetical economy is currently in a situation of deficient aggregate demand of $64 billion. Four economists agree that expansionary fiscal policy can increase total spending and move the economy out of recession, but they are debating which type of expansionary policy should be used. Economist A believes that the government spending multiplier is 8 and the tax multiplier is 2. Economist B believes that the government spending multiplier is 4 and the tax multiplier is 8. Compute the...
1. Which of the following is not typically a government objective? a. Low unemployment b. Fast...
1. Which of the following is not typically a government objective? a. Low unemployment b. Fast economic growth c. Stable prices d. Greater regional income inequality 2. Which of the following is not an example of fiscal policy? a. Higher interest rates b. Lower income tax c. Higher corporation tax d. Greater government spending 3. The government's budget position measures the difference between: a. Export spending and import spending b. Government spending and income c. Government consumption and investment d....
When the economy is in recession, which of the following fiscal policy tools can be used...
When the economy is in recession, which of the following fiscal policy tools can be used to stimulate the economy? 1.Reducing inefficient employment of resources 2.Increased government purchases 3.Increased imports 4.Lower interest rates
1) If the stock market crashes, then aggregate demand increases, which the Fed could offset by...
1) If the stock market crashes, then aggregate demand increases, which the Fed could offset by increasing the money supply. aggregate demand increases, which the Fed could offset by decreasing the money supply. aggregate demand decreases, which the Fed could offset by increasing the money supply. aggregate demand decreases, which the Fed could offset by decreasing the money supply. 2) In order to avoid entering a recession, the government of Batavia spent $300 billion improving infrastructure around the country. Assuming...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT