The crowding-out effect:
A)increases the demand for money and increases private investment.
B)increases the demand for money and increases consumption expenditure.
C)increases the demand for money and decreases consumption expenditure.
D)decreases the demand for money and increases private investment.
E)decreases the demand for money and increases consumption expenditure.

Question

Quizplus · Accepted Answer

The crowding-out effect refers to the decrease in private sector spending (consumption and investment) caused by an increase in government spending. When the government spends more, it increases the demand for money, leading to higher interest rates. As a result, the private sector reduces its spending, particularly in investment, because borrowing becomes more expensive. Therefore, the crowding-out effect leads to a decrease in private sector spending and an increase in demand for money.

The Crowding-Out Effect