The ﬁnancing of a government deﬁcit increases interest rates and, as a result, reduces investment spending. This statement describes
A) the supply-side effects of ﬁscal policy.
B) built-in stability.
C) the crowding-out effect.
D) the net export effect.

Question

Quizplus · Accepted Answer

The statement describes the crowding-out effect, which is the reduction in private investment due to increased government borrowing (and subsequent increase in interest rates) to finance a deficit.

The ﬁNancing of a Government Deﬁcit Increases Interest Rates And