Fiscal Policy and Crowding Out

What action might a central bank take to counteract the inflationary effects of increased government spending?

• Increase the money supply.

• Decrease interest rates.

• Contract the money supply.

• Encourage more government borrowing.

When a government increases spending by borrowing, what is a potential consequence for private sector investment?

• Private sector investment increases due to higher demand.

• Private sector investment remains unchanged.

• Private sector investment decreases due to higher interest rates.

• Private sector investment shifts to government bonds.

What economic theory suggests that tax cuts may not stimulate the economy if people save the extra money in anticipation of future tax increases?

• Supply-side economics.

• Keynesian economics.

• Ricardian Equivalence.

• Monetarism.

Which of the following factors can influence the effectiveness of fiscal policy?

• Only the government's spending decisions.

• How central banks, businesses, and consumers respond.

• The global stock market performance.

• The political party in power.