The crowding-out effect implies that:

Question

Quizplus · Accepted Answer

The crowding-out effect suggests that an increase in government spending may cause interest rates to rise, which can reduce private investment as businesses will face higher borrowing costs. This can lead to a reduction in overall economic activity, as investment is an important contributor to economic growth. Therefore, choice D is the correct answer. Choices A and B are incorrect because they suggest that government spending can directly reduce consumption and saving, respectively, without considering the impact on the interest rate. Choice C is incorrect because it suggests that fiscal and monetary policy will offset each other, which is not always the case as their effectiveness depends on various factors.

The Crowding-Out Effect Implies That