The crowding-out effect suggests that:
A)increases in consumption are always at the expense of saving.
B)increases in government spending will close a recessionary gap.
C)increases in government spending may raise the interest rate and thereby reduce investment.
D)high taxes reduce both consumption and saving.

Question

Quizplus · Accepted Answer

The crowding-out effect suggests that increases in government spending may raise the interest rate and thereby reduce investment. This happens because the increased demand for loanable funds by the government leads to higher interest rates, making it more expensive for businesses and individuals to borrow money for investment. Thus, the crowding-out effect can have negative implications for economic growth, as it reduces private sector investment.

The Crowding-Out Effect Suggests That