The crowding-out effect:
A)increases interest rates and decreases private investment.
B)decreases both interest rates and decreases private investment.
C)increases both interest rates and private investment.
D)increases both interest rates and consumption expenditure.
E)decreases interest rates and increases consumption expenditure.

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when the government increases its spending, leading to an increase in demand for loanable funds. This increase in demand causes interest rates to rise, making it more expensive for individuals and businesses to borrow money. As a result, private investment decreases, which is reflected in decreased economic growth. Therefore, choice A is the best answer as it correctly identifies the crowding-out effect as causing an increase in interest rates and a decrease in private investment.

The Crowding-Out Effect