The "crowding out" effect refers to the:
A) increase in domestic investment by foreigners, leaving little investment choice for domestic investors.
B) reduction in the interest rate caused by governments running a deficit.
C) reduction in domestic investment caused by governments running a deficit.
D) irrational exuberance of the market reducing the number of rational investments available.

Question

Quizplus · Accepted Answer

The "crowding out" effect refers to the reduction in domestic investment caused by governments running a deficit. When a government spends more money than it collects in taxes, it must borrow from the financial markets, which increases the demand for loanable funds and drives up interest rates. This increase in interest rates makes it more expensive for businesses and individuals to borrow, causing a reduction in investment and economic growth. This is known as the "crowding out" effect because government borrowing is crowding out private investment.

The "Crowding Out" Effect Refers to The