The crowding-out effect occurs when
A)foreign investors crowd out U.S. investors in the market for loanable funds.
B)the federal government's demand for loanable funds due to a higher budget deficit crowds out the private demand in the market for loanable funds.
C)institutional investors crowd out individual investors in the market for loanable funds.
D)firms and municipal governments crowd out households in the market for loanable funds.

Question

Quizplus · Accepted Answer

The crowding-out effect refers to the situation where increased government borrowing (to finance a budget deficit) leads to higher interest rates, which in turn reduces investment spending by the private sector. This happens because the government's demand for loanable funds increases, making less available for private borrowers.

The Crowding-Out Effect Occurs When