Crowding out occurs when an increase in government spending ______ the interest rate and investment ______.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

Question

Quizplus · Accepted Answer

An increase in government spending leads to an increase in demand for loanable funds, which drives up the interest rate. Higher interest rates make borrowing more expensive for firms, which lowers investment. This phenomenon is known as crowding out. Therefore, the correct answer is B, where an increase in government spending leads to an increase in the interest rate and a decrease in investment.

Crowding Out Occurs When an Increase in Government Spending ______