The phenomenon of a government deficit accompanied by a tight money policy,leading to a rise in interest rates and causing a reduction in private spending,is an example of

Question

Quizplus · Accepted Answer

The scenario described in the question is a typical example of the crowding-out effect. When the government runs a deficit, it increases its demand for credit, which causes interest rates to rise. This rise in interest rates makes it expensive for private investors to borrow money, hence reducing their spending. This, in turn, offsets the expansionary impact of the government's deficit spending, leading to a net decline in total spending or "crowding out."

The Phenomenon of a Government Deficit Accompanied by a Tight