Crowding out is most likely to occur when the federal government
A)Runs a surplus and pays off part of the debt.
B)Has a balanced budget and refinances a portion of the debt that matures.
C)Runs a deficit and raises taxes to generate more revenue.
D)Runs a deficit and sells bonds to make up the difference.

Question

Quizplus · Accepted Answer

Crowding out occurs when the government sells bonds to finance a deficit, and private investment decreases as a result, due to higher interest rates. This means that private investment is being "crowded out" by the government's borrowing. Options A and B suggest that the government is decreasing the debt, which would not lead to crowding out. Option C implies the government is raising taxes (not borrowing), which also wouldn't lead to crowding out.

Crowding Out Is Most Likely to Occur When the Federal