The crowding-out effect of borrowing to finance the public debt:
A)decreases current spending for private investment.
B)increases the privately owned stock of real capital.
C)decreases the economic burden on future generations.
D)increases incentives to work and save.

Question

Quizplus · Accepted Answer

When the government borrows to finance the public debt, it increases the demand for credit, which leads to higher interest rates. Higher interest rates make it more expensive for individuals and businesses to borrow, reducing their willingness or ability to invest in new projects or expand their businesses. This decrease in private investment spending, caused by the government's increased demand for credit, is known as the crowding-out effect. Therefore, the best choice is A, which states that the crowding-out effect decreases current spending for private investment.

The Crowding-Out Effect of Borrowing to Finance the Public Debt