Question

The multiplier effect a. amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects. b. diminishes the effects of an increase in government expenditures, while the crowding-out effect amplifies the effects. c. and the crowding-out effect both amplify the effects of an increase in government expenditures. d. and the crowding-out effect both diminish the effects of an increase in government expenditures.

Answer 1

Answer: Option A

 

Explanation: The multiplier effect applies to the proportional amount of final income increase arising from an investment injection by the govt. Conversely, as spending drops, a multiplier effect may also work in reverse, showing a corresponding decline in profits.

Crowding out is an economic philosophy that defines a scenario where private consumption of goods and services and business investment is limited due to higher government spending and deficit financing eating up the available financial resources and higher interest rates.

Hence from the above we can conclude that the correct answer is A.