What is meant by crowding out?
A) when current budget deficits prevent future fiscal policy initiatives
B) the potential for government spending to stimulate private investment in an otherwise dead economy
C) the displacement of interest-sensitive private investment that occurs when higher government deficits drive up market interest rates
D) when budget deficits constrain current fiscal initiatives

Question

What is meant by crowding out?  
A) when current budget deficits prevent future fiscal policy initiatives 
B) the potential for government spending to stimulate private investment in an otherwise dead economy 
C) the displacement of interest-sensitive private investment that occurs when higher government deficits drive up market interest rates 
D) when budget deficits constrain current fiscal initiatives

Quizplus · Accepted Answer

Crowding out refers to the situation where higher government deficits lead to increased demand for credit, which in turn causes interest rates to rise. This rise in interest rates makes borrowing more expensive for businesses and households, which can then lead to a decrease in investment and consumption. As a result, the increase in government spending crowds out private investment and consumption, leading to a net decrease in economic activity.

What Is Meant by Crowding Out