The "crowding-out effect" suggests that:
A)tax increases are paid primarily out of saving and therefore are not an effective fiscal device.
B)increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.
C)it is very difficult to have excessive aggregate spending in our economy.
D)consumer and investment spending always vary inversely.

Question

Quizplus · Accepted Answer

The "crowding-out effect" suggests that increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment. This is because the increased demand for borrowing will drive up interest rates, making it more expensive for businesses and individuals to borrow money for investment purposes, thus decreasing investment.

The "Crowding-Out Effect" Suggests That