The response of investment spending to an increase in the government budget deficit is called

Question

Quizplus · Accepted Answer

The response of investment spending to an increase in the government budget deficit is called crowding out. This happens when the increase in government borrowing to finance the deficit leads to an increase in interest rates, which in turn decreases private investment because it becomes more expensive to borrow money. Therefore, the private sector is crowded out by the public sector in terms of borrowing, investment and spending.

The Response of Investment Spending to an Increase in the Government