Which of the following correctly explains the crowding-out effect?
A)An increase in government expenditures decreases the interest rate and so increases investment spending.
B)An increase in government expenditures increases the interest rate and so reduces investment spending.
C)A decrease in government expenditures increases the interest rate and so increases investment spending.
D)A decrease in government expenditures decreases the interest rate and so reduces investment spending.

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when increased government spending leads to higher interest rates, which in turn reduces investment spending by the private sector. This is because government borrowing to finance its expenditures can lead to a decrease in the supply of savings available for private investment, pushing interest rates up.

Which of the Following Correctly Explains the Crowding-Out Effect