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Alex17521 [72]
3 years ago
6

The new classical critique of activist fiscal policy is theoretically different from the crowding-out critique. Crowding-out occ

urs when private spending __________ in response to government spending. Under the new classical critique, increased government spending leads people to __________ their current savings in order to help pay for higher taxes in the future.
A. decreases; decrease
B. increases; increase
C. decreases; increase
D. increases; decrease
Business
1 answer:
Alik [6]3 years ago
6 0

Answer:

C. decreases; increase

Explanation:

Although both the crowding-out critique and the classical critique both argue that more public spending (activist fiscal policy) will lead to less private spending (thus less-than-expected increase in demand for the economy to grow), the reasons they put forward are subtly different.

Crowding-out happens because government spending reduces the money supply (hence raise interest rate - the price of money) or investment opportunities to the private sector, making it <em>difficult for the private sector to spend</em> , hence there's less private spending.

The classical critique argues that because people anticipate that goverment will increase tax in the future to cover for the fiscal deficit, <em>they will save more to pay for tax</em>, also leading to less private spending.

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