If the government has a budget deficit, crowding out might occur. Crowding out leads to all of the following EXCEPT
A) a smaller capital stock in the future.
B) a decreased quantity of investment.
C) a higher real interest rate.
D) decreased private saving.

Question

Quizplus · Accepted Answer

Crowding out occurs when government borrowing leads to an increase in the demand for loanable funds, which leads to an increase in the real interest rate. This increase in the interest rate causes a decrease in private investment, as firms are less willing to borrow money to invest in new projects. It also leads to a decrease in private saving, as individuals are more likely to save their money at the higher interest rate. However, it does not lead to a smaller capital stock in the future; rather, it leads to a smaller increase in the capital stock than there would be in the absence of crowding out.

If the Government Has a Budget Deficit, Crowding Out Might