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 phenomenon where an increase in government spending leads to a decrease in private investment due to higher interest rates. In this graph, a movement from point 1 to point 2 on curve A would indicate an increase in government spending, causing interest rates to rise and reducing private investment, thus illustrating the crowding-out effect. The other choices do not demonstrate the crowding-out effect.

Refer to the Above Graph