The "crowding out" effect refers to:
A)the increase in domestic investment by foreigners,leaving little investment choice for domestic investors.
B)the reduction in the interest rate caused by governments running a deficit.
C)the reduction in domestic investment caused by governments running a deficit.
D)the irrational exuberance of the market reducing the number of rational investments available.

Question

Quizplus · Accepted Answer

The "crowding out" effect occurs when governments run a deficit, leading to an increase in borrowing and a decrease in the availability of loanable funds for private investment. This reduction in the supply of loanable funds leads to an increase in interest rates, which in turn discourages private investment. Therefore, option C - the reduction in domestic investment caused by governments running a deficit - is the correct answer.

The "Crowding Out" Effect Refers To