Crowding out suggests that
A) high taxes reduce both consumption and saving.
B) increases in consumption are always at the expense of saving.
C) increases in government spending may raise the interest rate,thereby reducing investment.
D) increases in government spending will close a recessionary gap.

Question

Quizplus · Accepted Answer

Crowding out suggests that increases in government spending may raise the interest rate, thereby reducing investment. This happens because when the government borrows more money, it increases the demand for loanable funds, which drives up interest rates, making it more expensive for private investors to borrow and invest. As a result, private investment decreases, causing a reduction in the overall level of investment, which can lead to a decrease in long-run economic growth.

Crowding Out Suggests That