"Crowding-out" refers to the process by which
A)high consumption leads to low saving and investment.
B)the Fed prevents "runs" on banks.
C)Fed sales of bonds reduce the ability of corporations to buy bonds.
D)increased government spending raises interest rates, thus lowering investment spending.

Question

Quizplus · Accepted Answer

Crowding-out refers to the situation where increased government spending results in higher interest rates, which reduces investment spending by businesses. This reduction in investment spending offsets the initial increase in overall spending, resulting in no net increase in economic activity. This happens because when the government borrows from the loanable funds market to finance the increase in spending, there is a reduced amount of funds available for businesses and individuals to borrow, leading to increased demand and thus higher interest rates.

"Crowding-Out" Refers to the Process by Which