Assume the government incurs a budget deficit which is financed by borrowing.As a result, interest rates rise and the volume of private investment spending declines.This illustrates:

Question

Quizplus · Accepted Answer

The scenario described is an example of the crowding-out effect. When the government borrows to finance a budget deficit, it increases the demand for loanable funds, which causes interest rates to rise. This increase in interest rates makes borrowing more expensive for households and businesses, which reduces their investment spending. This decrease in private investment spending is called the crowding-out effect.

Assume the Government Incurs a Budget Deficit Which Is Financed