Question

A decrease in the budget deficit will have
a. more negative effect on income when crowding out is strong. more positive effect on income when crowding out is weak. less negative effect on income when crowding out is strong. less positive effect on income when crowding out is weak.

Answer 1

It will have less negative effect on income when the crowding out is strong. This reduction will lead to lowered interest rates, which will increase the number of businesses looking for loans as a form of investment. This investment will offset the drop in income that could take place as a result of the contractionary policy.