The crowding-out effect implies that an increase in government borrowing to finance deficit financing results in _____.
A)an increase in the demand for money that causes interest rate to rise
B)a decrease in the demand for money that causes interest rate to rise
C)an increase in private investments by businesses
D)an increase in the demand for money that causes interest rate to fall
E)an increase in consumption spending by households.

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when the government borrows money from the financial market, increasing the demand for money, which in turn causes interest rates to rise. This increase in interest rates leads to a decrease in private investment spending as businesses find it more expensive to borrow money, and hence less capital is available for investment purposes. Therefore, Option A is the correct answer.

The Crowding-Out Effect Implies That an Increase in Government Borrowing