Crowding out results in:
A)higher interest rates, a lower exchange rate and lower net exports.
B)higher interest rates, a higher exchange rate and lower net exports.
C)lower interest rates, a lower exchange rate and lower net exports.
D)lower interest rates, a higher exchange rate and lower net exports.

Question

Quizplus · Accepted Answer

Crowding out occurs when the government borrows funds from the financial market, which reduces the amount of funds that private borrowers can access, leading to higher interest rates. Higher interest rates will attract foreign investors, and this will, in turn, lead to an appreciation in the exchange rate. A higher exchange rate will make exports expensive, leading to lower net exports. Hence, option B of higher interest rates, a higher exchange rate, and lower net exports is correct.

Crowding Out Results In