The crowding-out effect implies that a government budget deficit ________ the demand for loanable funds and ________ equilibrium investment.
A) does not change; does not change
B) increases; decreases
C) increases; increases
D) decreases; decreases
E) decreases; increases

Question

Quizplus · Accepted Answer

The crowding-out effect suggests that when the government borrows more (to finance a budget deficit), it increases the demand for loanable funds, which typically raises interest rates. Higher interest rates, in turn, discourage private investment, leading to a decrease in equilibrium investment.

The Crowding-Out Effect Implies That a Government Budget Deficit ________