The crowding-out effect occurs when household consumption and investment spending decrease as a result of financing a budget deficit.

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This is correct. When the government runs a budget deficit, it may have to borrow money by issuing bonds. This can lead to higher interest rates, which in turn can discourage investment and consumption spending by households and firms. This phenomenon is known as the crowding-out effect.

The Crowding-Out Effect Occurs When Household Consumption and Investment Spending