Refer to the above graph.The crowding-out effect would be illustrated by a:
A)shift from curve A to curve B leading to a decrease in investment.
B)shift from curve B to curve A leading to a decrease in interest rates.
C)movement from point 1 to point 2 on curve A leading to a decrease in investment.
D)movement from point 2 to point 1 on curve A leading to a decrease in investment.

Question

Refer to the above graph.The crowding-out effect would be illustrated by a:
A)shift from curve A to curve B leading to a decrease in investment. 
B)shift from curve B to curve A leading to a decrease in interest rates. 
C)movement from point 1 to point 2 on curve A leading to a decrease in investment. 
D)movement from point 2 to point 1 on curve A leading to a decrease in investment.

Quizplus · Accepted Answer

The crowding-out effect refers to the decrease in investment due to an increase in government borrowing, which leads to an increase in interest rates. In the graph, the movement from point 1 to point 2 on curve A represents an increase in government spending (i.e. borrowing) which leads to an increase in interest rates. The increase in interest rates then leads to a decrease in investment, which is shown by the movement from point 2 back to point 1 on curve A. Therefore, choice C is the best answer.

Refer to the Above Graph