Answer: Option (B) is correct.
Explanation:
Suppose there is an increase in the government spending which means that it is a expansionary fiscal policy, this will also results in an increase in the government borrowings. Now, this increase in the government borrowings will increase demand for the loanable funds, as a result interest rate increases. This rise in the interest rate will lead to a reduction in investment spending.
Hence, the government spending crowding out the investment spending. Therefore, crowding out reduces the effect of expansionary fiscal policy.
