The crowding-out effect suggests that

Question

Quizplus · Accepted Answer

The crowding-out effect suggests that a budget deficit, which involves borrowing money to finance government spending, may lead to higher interest rates. This increase in interest rates can crowd out private investment, decreasing the demand stimulus effects of a budget deficit, and ultimately leading to a weaker economy. This can be seen as the government's financing needs increase the demand for credit, causing interest rates to rise, which can lead to a decrease in private investment. As such, the correct answer is C.

The Crowding-Out Effect Suggests That