Which one of the following might offset a crowding-out effect of financing a large public debt?
A) A decline in net exports.
B) An increase in public investment.
C) A decrease in the money supply.
D) A decline in public investment.

Question

Quizplus · Accepted Answer

Financing a large public debt can lead to a crowding-out effect where private investment is reduced due to higher interest rates. However, an increase in public investment can offset this effect by increasing demand in the economy and spurring private investment. Therefore, choice B, an increase in public investment, is the best option to offset the crowding-out effect. Choices A and D are unrelated to the crowding-out effect of financing a public debt, and choice C, a decrease in the money supply, could actually exacerbate the crowding-out effect by further increasing interest rates.

Which One of the Following Might Offset a Crowding-Out Effect