The crowding-out effect refers to
A) an increase in the consumption of domestic goods at the expense of imported goods.
B) an increase in the consumption of imported goods at the expense of domestic goods.
C) a decrease in consumption and investment caused by an increase in government borrowing.
D) a decrease in consumer spending caused by a decrease in consumer confidence.

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when the government borrows funds, increasing the demand for loanable funds and driving up interest rates. Higher interest rates decrease private investment and consumption, as individuals and businesses have less incentive to borrow and spend. Therefore, option C is the correct choice as it describes the decrease in consumption and investment caused by an increase in government borrowing, which is the essence of the crowding-out effect.

The Crowding-Out Effect Refers to