The crowding out effect of government borrowing refers to a decrease in:
A) private consumption only.
B) private investment only.
C) both private consumption and private investment.
D) neither private consumption nor private investment.

Question

Quizplus · Accepted Answer

When the government borrows money, it increases the demand for credit, which causes interest rates to rise. As interest rates rise, individuals and businesses find it more expensive to borrow money, and they reduce their consumption and investment spending. This leads to a decrease in both private consumption and private investment, hence the crowding out effect.

The Crowding Out Effect of Government Borrowing Refers to a Decrease