The crowding-out effect suggests that
A) tax increases are paid primarily out of saving and therefore are not an effective ﬁscal device.
B) government borrowing to ﬁnance the public debt increases the real interest rate and reduces private investment.
C) it is very diﬃcult to have excessive aggregate spending in a capitalist economy.
D) consumer and investment spending always vary inversely.

Question

Quizplus · Accepted Answer

The crowding-out effect suggests that government borrowing to finance the public debt increases the real interest rate and reduces private investment. This is because when the government borrows a large amount of money, it competes with private businesses for investment funds, driving up interest rates and making it more expensive for businesses to borrow money. As a result, businesses may reduce their investment in capital goods, leading to a decrease in aggregate demand and economic growth.

The Crowding-Out Effect Suggests That