Economics · Macroeconomics

Which of the following correctly describes the 'crowding-out effect' in the IS-LM framework?

Verified Solution4 OptionsUpdated: October 2026👁️1 View

1A rise in government expenditure raises income but also raises interest rates, which reduces private investment✓
2A rise in money supply lowers interest rates and crowds in investment
3Tax cuts shift the LM curve to the right
4Higher government spending always lowers the interest rate

Correct answer

A rise in government expenditure raises income but also raises interest rates, which reduces private investment

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