The crowding-out effect refers to the possibility that an
A) increase in the money supply will result in a decline in taxes.
B) increase in consumption spending will crowd out government spending.
C) increase in private savings will crowd out the taxable income of households.
D) increase in government borrowing will result in higher interest rates, which will crowd out private investment and consumption.

Question

Quizplus · Accepted Answer

The crowding-out effect refers to the idea that an increase in government borrowing will lead to higher interest rates and, as a result, private investment and consumption will decline as they are "crowded out" by the increased demand for credit from the government. Therefore, choice D is the best answer. Choice A is incorrect because an increase in the money supply will typically lead to higher prices and inflation, and it is not directly related to taxes. Choice B is incorrect because an increase in consumption spending could potentially stimulate economic activity and lead to an increase in government revenue, rather than crowding out government spending. Choice C is incorrect because an increase in private savings would not necessarily lead to a decline in taxable income for households.

The Crowding-Out Effect Refers to the Possibility That an