'Crowding out' refers to the government's increased demand for credit, which:
A) displaces some private-sector consumption by decreasing the price level.
B) displaces some private-sector borrowing by decreasing the interest rate.
C) displaces some private-sector borrowing by increasing the interest rate.
D) hires labour away from the private sector.

Question

Quizplus · Accepted Answer

'Crowding out' occurs when the government borrows more money from the financial market, leading to an increase in interest rates. This increase in interest rates makes it more expensive for private-sector borrowers to borrow money, which ultimately reduces private investment. Therefore, option C is the best choice as it correctly explains that crowding out displaces some private-sector borrowing by increasing the interest rate.

'Crowding Out' Refers to the Government's Increased Demand for Credit