The "crowding out" effect refers to the:
A) increase in domestic investment by foreigners, leaving little investment choices for domestic investors.
B) reduction in the interest rate caused by governments running a deficit.
C) reduction in domestic investment caused by governments running a deficit.
D) None of these are true.

Question

Quizplus · Accepted Answer

The "crowding out" effect refers to the reduction in domestic investment caused by governments running a deficit. When a government runs a deficit, it must borrow money to finance its spending, which can increase demand for loanable funds and drive up interest rates. This can make it more difficult and expensive for domestic businesses and individuals to borrow money for investment, which can lead to a reduction in domestic investment.

The "Crowding Out" Effect Refers to The