When governments borrow in financial markets to pay for budget deficits, interest rates may increase and crowd out private investment spending.

Question

Quizplus · Accepted Answer

This is because when the government borrows in financial markets, it increases the demand for loanable funds, which can drive up interest rates, making it more expensive for private investors to borrow money for their own investments. This can lead to decreased private investment spending or "crowding out."

When Governments Borrow in Financial Markets to Pay for Budget