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A larger crowding-out effect: a. ​ decreases the magnitude of a given fiscal policy's effect on...

A larger crowding-out effect:

a.

​ decreases the magnitude of a given fiscal policy's effect on interest rates and increases the magnitude of its effects on investment.
b.

​ increases the magnitude of a given fiscal policy's effect on interest rates and increases the magnitude of its effects on investment.
c.

​ decreases the magnitude of a given fiscal policy's effect on interest rates and decreases the magnitude of its effects on investment.
d.

​ increases the magnitude of a given fiscal policy's effect on interest rates and decreases the magnitude of its effects on investment.
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Answer #1

Crowding out of private investment results when government's fiscal expansion raises interest rate and reduces the funds available for private investment. When there is complete crowding out (classical case) interest rate increase completely so that fiscal expansion results in reducing investment by full and there is no effect. Hence when crowding out is larger, the magnitude of the effect of a given fiscal policy on the rate of interest is increased (because interest rate will increase more with stronger crowding out) and the effect on investment is also strengthened.

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