The crowding-out effect occurs when
A)an expansion of the government's budget raises the interest rate.
B)a contraction of the government's budget raises the interest rate.
C)an expansionary monetary policy decreases the interest rate.
D)a contractionary monetary policy increases the interest rate.

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when an expansion of the government's budget raises the interest rate. This is because an increase in government borrowing increases the demand for credit, leading to a decrease in the supply of credit and an increase in the interest rate. As a result, private investment may decrease, leading to a reduction in economic growth.

The Crowding-Out Effect Occurs When