According to the crowding-out effect, a budget deficit will lead to:
A)reduced investment spending and a reduction in long-term economic growth.
B)reduced investment spending and an increase in long-term economic growth.
C)increased investment spending and a reduction in long-term economic growth.
D)increased investment spending and an increase in long-term economic growth.

Question

According to the crowding-out effect, a budget deficit will lead to:
A)​reduced investment spending and a reduction in long-term economic growth.
B)​reduced investment spending and an increase in long-term economic growth.
C)​increased investment spending and a reduction in long-term economic growth.
D)​increased investment spending and an increase in long-term economic growth.

Quizplus · Accepted Answer

The crowding-out effect suggests that when the government runs a budget deficit and borrows money from the private sector, it increases the demand for loanable funds, causing interest rates to rise. As a result, private investment spending decreases, leading to a reduction in long-term economic growth. Therefore, the correct choice is A, reduced investment spending and a reduction in long-term economic growth.

According to the Crowding-Out Effect, a Budget Deficit Will Lead