Crowding out occurs when I. the government borrows money from the public that firms would have used for investment funds. II. the government sells bonds, raising interest rates and causing people to save more and consume less. III. an economy is closed and does not trade with the outside world.

Question

Quizplus · Accepted Answer

Crowding out occurs when government borrowing reduces the amount of funds available for private investment. This happens when the government borrows from the public, thereby raising interest rates and reducing private investment. Option I correctly describes this scenario. Option II also correctly describes crowding out as government borrowing raises interest rates, which can lead to a decrease in private investment. Option III is not necessarily correct, as an economy can still experience crowding out when it trades with other countries. Therefore, the best choice is B.

Crowding Out Occurs When I