If an increase in the budget deficit reduces national saving and investment, we have witnessed a demonstration of
A) intermediation.
B) equity finance.
C) crowding out.
D) the investment fund effect.

Question

Quizplus · Accepted Answer

Crowding out occurs when an increase in government borrowing (to finance a budget deficit) reduces the availability of funds for private investment. This happens because higher demand for credit leads to an increase in interest rates, making it more expensive for businesses to borrow money for investment purposes. This reduces overall investment and can lead to a decrease in national saving.

If an Increase in the Budget Deficit Reduces National Saving