Question

The crowding-out effect refers to the possibility that deficit spending may motivate people to increase their saving in anticipation of higher future taxes.
True / False.

Answer 1

Answer:

True

Explanation:

True because "Crowding out" is a term used to describe a situation  when expansionary fiscal policies decrease  or "crowd out" private spending.

Consumers could respond to fiscal policy in ways that make fiscal policy less effective.   If the government cuts taxes to stimulate the economy,  people might then choose to save the tax cut.

 

Now, saving money from a tax cut actually makes a lot of sense if people expect that tax cuts today will be matched by tax increases tomorrow.