CFA Level I · CFA Level I Exam · Fiscal Policy
A government increases spending financed by issuing bonds, pushing up interest rates and reducing private investment, which partly offsets the expansion in aggregate demand. This effect most likely lowers the:
This crowding-out effect most likely lowers the fiscal multiplier. Higher interest rates from bond-financed borrowing reduce private investment, offsetting part of the demand boost from government spending, so the net rise in output per unit of spending is smaller.
- Afiscal multiplier.Correct
- Bmarginal propensity to consume.
- Csize of the automatic stabilizers.
Explanation
Crowding out of private investment by higher interest rates offsets part of the fiscal stimulus, so the net effect on output per unit of spending, the effective multiplier, is smaller. It does not directly change the MPC or the structure of automatic stabilizers.
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