Government spends more on public transport and households spend less on private transport. What is this called?
AA federal budget deficit
BA wage-price spiral
CCrowding out of spending
DThe circular flow model
Answer & Solution
Correct answer: C. Crowding out of spending
1. Crowding out is the situation that occurs when government spending replaces spending by the private sector.
2. More government spending on public transport with less private spending on private transport is exactly that pattern.
3. The same pattern appears when public libraries reduce book buying, or public education reduces private education spending.
4. The private sector has less money to spend because government has taken more of it.
5. A budget deficit is spending in excess of tax revenue, which is a different measure.
6. A wage-price spiral is a cause of cost-push inflation.
7. The circular flow shows the exchanges among households, businesses and governments, not this particular displacement.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 1 "Understanding Economic Systems and Business", section 1.5 Achieving Macroeconomic Goals_
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