Which of the following provides an example of "crowding out"?
A) Increases in government purchases cause more government borrowing, which decreases the funds that are available for private investors to borrow in the loanable funds markets.
B) Increases in the interest rate cause people to spend more.
C) Increases in the money supply lead to higher spending, which crowds out unemployment.
D) Decreases in taxes cause the government to borrow more, which reduces interest rates in the loanable funds markets.

Question

Quizplus · Accepted Answer

Crowding out occurs when increased government spending leads to higher borrowing by the government, which in turn raises interest rates and reduces the amount of capital available for private investment. Option A accurately describes this process by stating that increases in government purchases and subsequent borrowing decrease the funds available for private investors in the loanable funds markets.

Which of the Following Provides an Example of "Crowding Out