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Question 9 In an open economy, which of the following will be crowded out when government purchases increase? consumption exp
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Answer #1

Answer: All of these will be crowded out.

When the government purchases or spending , i.e., 'G' increases, it eventually increases the interest rate, and thus decreases the investment expenditure. The higher interest rate also increases the exchange rate that decreases the net exports of the economy. The consumption spending also decreases by the amount of borrowed money from the household sector.

Thus, when the government purchases increases in an economy, it will crowd out the consumption expenditure, investment expenditure, and net exports of the economy.

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