Crowding out refers to the government borrowing funds, leading to higher interest rates in the economy. As borrowing costs increase, the private sector may reduce their investments, causing a reduction in overall economic activity. Hence, higher interest rates generated by government borrowing drive crowding out.

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Crowding Out

Question 241

Multiple Choice

Crowding out

A) refers to government spending crowding out imports.
B) aids expansionary fiscal policy.
C) enhances expansionary fiscal policy.
D) is driven by higher interest rates generated by government borrowing.

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