The crowding-out effect recognizes that if the government sells bonds to finance spending, it can cause interest rates to _____ consumer spending and investment.
A) fall, thereby reducing
B) fall, thereby stimulating
C) rise, thereby reducing
D) rise, thereby stimulating

Question

Quizplus · Accepted Answer

When the government sells bonds to finance spending, it increases the demand for loanable funds, which results in an increase in interest rates. This increase in interest rates leads to a reduction in consumer spending and investment, as businesses and individuals are less willing to borrow money at higher interest rates. This is known as the crowding-out effect. Therefore, the correct answer is C) rise, thereby reducing.

The Crowding-Out Effect Recognizes That If the Government Sells Bonds