The federal government has a large public debt that it ﬁnances through borrowing. As a result, real interest rates are higher than otherwise and the volume of private investment spending is lower. This
Illustrates the
A) equation-of-exchange effect.
B) paradox of thrift.
C) crowding-out effect.
D) net export effect.

Question

Quizplus · Accepted Answer

The situation described in the question is an example of crowding-out effect. When the government increases its borrowing, it competes with the private sector for funds, leading to higher interest rates and a decrease in private investment spending. This phenomenon is referred to as crowding-out effect.

The Federal Government Has a Large Public Debt That It