Assume that fewer businesses offer new bonds to raise investment funds when government borrowing increases interest rates. This would be an example of:

Question

Quizplus · Accepted Answer

Crowding out occurs when government borrowing increases interest rates, making it less attractive for businesses to borrow and invest in new projects. This leads to a decrease in the supply of bonds offered by businesses to raise investment funds. Therefore, option C is the correct answer. Ricardian equivalence refers to the idea that consumers may adjust their spending patterns based on expectations of future taxes and government borrowing, while the tax multiplier and balanced-budget multiplier relate to the effects of changes in government spending and taxation on economic output. Increased consumption is not directly related to government borrowing and interest rates.

Assume That Fewer Businesses Offer New Bonds to Raise Investment