Crowding-out

Question

Crowding-out

Quizplus · Accepted Answer

Crowding-out refers to the displacement of private spending or investment by increased government spending. This is due to the fact that as government spending increases, interest rates rise, which makes borrowing more expensive for private firms and consumers. Thus, some form of private consumption or investment necessarily has to be reduced to accommodate the increased borrowing costs.

B) is incorrect because crowding-out can occur even when the economy is not at full employment, as long as it operates near potential output.

C) is also incorrect because crowding-out does not necessarily lead to inflation during periods of slack employment. Rather, it can result in reduced private investment and lower economic growth.

D) is partially correct, but incomplete, as crowding-out does indeed involve the loss of leisure by workers who are employed as a result of government spending. However, it also involves the reduction in private consumption or investment that is necessary to accommodate the increased government borrowing.

Crowding-Out