Which of the following best explains what is meant by the term crowding out?
A)An increase in government purchases causes interest rates to rise and results in a decline in investment expenditures.
B)An increase in government purchases causes interest rates to fall and results in a decline in investment expenditures.
C)An increase in investment causes interest rates to rise and results in a drop in government purchases.
D)Increases in consumption expenditures cause interest rates to rise and result in a decline in investment expenditures.
E)An increase in consumption expenditures causes interest rates to rise and results in a decline in government purchases.

Question

Quizplus · Accepted Answer

Crowding out refers to the decrease in private sector spending (investment and consumption) that occurs as a result of an increase in government spending. When the government increases its purchases, it issues more bonds to finance the increase, causing interest rates to rise. This makes borrowing more expensive for businesses, leading them to reduce their investment expenditures. Therefore, choice A best explains crowding out as it describes how an increase in government purchases causes interest rates to rise and results in a decline in investment expenditures.

Which of the Following Best Explains What Is Meant by the Term