Crowding-out is the notion that:
A)since tax revenues vary directly with GDP, a rise in the level of GDP will increase the budget surplus and limit expansion.
B)deficit financing will increase the demand for money, increase the interest rate, and reduce the level of investment spending in the economy.
C)the full-employment budget is the best indicator of whether a budget deficit crowds out investment.
D)the actual budget is the best indicator of whether a budget deficit crowds out saving.

Question

Quizplus · Accepted Answer

Crowding-out refers to the reduction in private investment that occurs when government borrows funds to finance its deficit spending. Deficit financing increases the demand for money, which leads to higher interest rates that, in turn, discourage private investment and reduce the level of aggregate demand in the economy. Therefore, choice B is the correct option.

Crowding-Out Is the Notion That