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Chapter 12: Problem 11

Which of the following is an example of crowding out? (LO7) a) Federal government spending causes changes in state and local government spending. b) Government spending reduces private spending. c) Tax changes perceived as temporary are largely ignored. d) Government spending causes the price level to rise.

Short Answer

Expert verified
Answer: b) Government spending reduces private spending.

Step by step solution

01

Option a: Federal government spending causes changes in state and local government spending.

This option talks about the relationship between federal, state, and local government spending. It doesn't specifically mention any impact on private spending or investment. So, this option is not an example of crowding out.
02

Option b: Government spending reduces private spending.

This option directly states that government spending results in reducing private spending. This is the definition of crowding out, where increased government spending reduces or displaces private spending or investment. Hence, this option is an example of crowding out.
03

Option c: Tax changes perceived as temporary are largely ignored.

This option discusses the effect of temporary tax changes on behavior. It does not mention any impact on private spending or investment due to government spending, so this option is not an example of crowding out.
04

Option d: Government spending causes the price level to rise.

This option states the effect of government spending on the price level, which is a macroeconomic concept related to inflation. Though rising price level might indirectly impact private spending or investment, it doesn't explicitly show the displacement of private spending due to government spending. Thus, this option is not a direct example of crowding out. Based on the analysis of all the given options, the correct answer is:
05

Answer:

b) Government spending reduces private spending.

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Most popular questions from this chapter

Each of the following is an example of discretionary fiscal policy except (LO4) a) public works spending b) making the automatic stabilizers more effective c) changes in tax rates d) the unemployment insurance program

Budget surpluses are most appropriate during (LO5) a) depressions b) recessions c) inflations

Which one of these would be the most accurate statement? (L?6) a) There was a very short fiscal policy decision lag in \(2008 .\) b) There was virtually no fiscal policy impact lag in 2008 . c) In 2008 rebate checks were sent out within weeks after the beginning of the economic slowdown. d) President George W. Bush and the leaders of Congress were very slow to act after recognizing that there was an economic slowdown in early 2008 .

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