The crowding-out effect stresses that increased government borrowing to cover a budget deficit will cause
A) a higher interest rate and depreciation of the U.S. dollar.
B) a higher interest rate and appreciation of the U.S. dollar.
C) a lower interest rate and depreciation of the U.S. dollar.
D) a lower interest rate and appreciation of the U.S. dollar.
E) no change in the interest rate and depreciation of the U.S. dollar.

Question

Quizplus · Accepted Answer

The crowding-out effect is the reduction in private sector investment that occurs when there is an increase in government borrowing, which can lead to increased interest rates. As the government borrows more money, it increases the demand for loanable funds, which causes interest rates to rise. The higher interest rates can attract foreign investors, leading to an appreciation of the currency (in this case, the U.S. dollar). Therefore, the correct answer is B: a higher interest rate and appreciation of the U.S. dollar.

The Crowding-Out Effect Stresses That Increased Government Borrowing to Cover