When a federal budget deficit causes crowding out:
A) real GDP does not increase by as much as the government purchases of goods and services multiplier would predict because bond-holders' saving declines.
B) real GDP does not increase by as much as the government purchases of goods and services multiplier would predict because investment declines.
C) interest rates fall, reducing the burden of the debt.
D) interest rates fall, bringing the current deficit back down.

Question

Quizplus · Accepted Answer

Crowding out occurs when government spending increases, leading to an increase in demand for loanable funds, which in turn raises interest rates. Higher interest rates discourage private investment and consumption, leading to a decrease in the overall level of output. Therefore, real GDP does not increase by as much as the government purchases of goods and services multiplier would predict because investment declines.

When a Federal Budget Deficit Causes Crowding Out