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Unformatted text preview: the price level, also has a similar effect on the rate of interest. Rising level of the interest rate has a discouraging effect on private investment activity. Thus increased public investment expenditure causes a fall in the private investment activity. This is called the 'crowding-out' effect. It is claimed therefore that fiscal policy is likely to develop a self-defeating tendency . On the other hand, during the phase of inflation, contraction in public expenditure can be equally self-defeating. In this case with a fall in the effective demand, the rate of interest will tend to fall and will encourage private investment activity. This is exactly the opposite case and therefore can be called the 'crowding-in' effect....
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This note was uploaded on 11/17/2011 for the course EC ec 201 taught by Professor - during the Fall '10 term at Montgomery.
- Fall '10