The crowding-out effect is caused by
A) an increase in the money supply increases the demand for goods and services, and thus crowds out investment.
B) an increase in government purchases reduces the demand for goods and services, and thus crowds out investment.
C) an increase in consumer income increases the demand for goods and services, and thus crowds out investment.
D) an increase in government purchases increases the demand for goods and services, and thus crowds out investment.

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when increased government spending leads to higher interest rates, which reduces private investment. This happens because government borrowing can increase demand for loanable funds, raising interest rates and making it more expensive for businesses to borrow and invest.

The Crowding-Out Effect Is Caused by