Crowding out is caused by a _____
A) reduction in government purchases of goods and services.
B) reduction in the value of the multiplier used for government purchases of goods and services by increasing the interest rate.
C) reduction in the value of the multiplier used for government purchases of goods and services by increasing the marginal propensity to consume.
D) reduction in the value of the multiplier used for government purchases of goods and services by decreasing the marginal propensity to consume.
E) reduction in the imports of goods and services.

Question

Quizplus · Accepted Answer

Crowding out occurs when the government increases its borrowing to finance its spending, causing interest rates to rise and reducing private investment. This happens because higher interest rates increase the cost of borrowing for individuals and businesses, making them less likely to borrow and spend money. Option B is the only option that correctly identifies the mechanism through which crowding out occurs, as it involves a reduction in the value of the multiplier used for government purchases of goods and services by increasing the interest rate.

Crowding Out Is Caused by a _____