The crowding-out effect indicates that increased government borrowing will lead to:
A)an increase in consumption by households and an increase in investment spending by firms.
B)an increase in consumption by households and a decrease in investment spending by firms.
C)a decrease in consumption by households and an increase in investment spending by firms.
D)a decrease in consumption by households and a decrease in investment spending by firms.

Question

The crowding-out effect indicates that increased government borrowing will lead to:
A)​an increase in consumption by households and an increase in investment spending by firms.
B)​an increase in consumption by households and a decrease in investment spending by firms.
C)​a decrease in consumption by households and an increase in investment spending by firms.
D)​a decrease in consumption by households and a decrease in investment spending by firms.

Quizplus · Accepted Answer

The crowding-out effect suggests that increased government borrowing will lead to a decrease in the availability of funds for private investment. This is because government borrowing increases demand for loanable funds, driving up interest rates. Higher interest rates discourage firms from borrowing and investing, which can ultimately lead to a decrease in investment spending. Additionally, higher interest rates can also lead to a decrease in consumption by households, as borrowing costs increase, making it more expensive for households to finance their purchases. Therefore, the correct answer is D, a decrease in consumption by households and a decrease in investment spending by firms.

The Crowding-Out Effect Indicates That Increased Government Borrowing Will Lead