Crowding out occurs when investment declines because
A)a budget deficit makes interest rates rise.
B)a budget deficit makes interest rates fall.
C)a budget surplus makes interest rates rise.
D)a budget surplus makes interest rates fall.

Question

Quizplus · Accepted Answer

Crowding out occurs when the government borrows money to finance a budget deficit, which increases the demand for credit, pushing up interest rates. This leads to a decrease in private investment because borrowing becomes more expensive, crowding out private borrowers. Therefore, the correct choice is A, a budget deficit makes interest rates rise, which leads to crowding out.

Crowding Out Occurs When Investment Declines Because