-Refer to the above diagram.Initially assume that the investment demand curve is I_d1.The crowding-out effect of a large government deficit would be shown as a(n) :

Question

-Refer to the above diagram.Initially assume that the investment demand curve is I_d1.The crowding-out effect of a large government deficit would be shown as a(n):

Quizplus · Accepted Answer

The crowding-out effect occurs when increased government borrowing leads to higher interest rates, which in turn reduces private investment. An increase in the interest rate from 4 percent to 6 percent and a decline in investment spending of $5 billion illustrates this effect.

-Refer to the Above Diagram