The crowding-out effect implies that a government budget deficit ________ the demand for loanable funds and ________ equilibrium investment.

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when the government borrows funds, which increases the demand for loanable funds, leading to an increase in the interest rate. Higher interest rates discourage private investment, which leads to a decrease in equilibrium investment. Therefore, a government budget deficit increases the demand for loanable funds (crowding out private investment) and decreases equilibrium investment.

The Crowding-Out Effect Implies That a Government Budget Deficit ________