Crowding out can best be defined as
A)higher interest rates caused by restrictive monetary policy, which reduces investment.
B)higher interest rates caused by restrictive monetary policy, which increases saving and reduces consumption spending.
C)government budget deficits causing a drop in private borrowing because of higher interest rates.
D)government budget deficits causing a drop in interest rates, which reduces private saving.

Question

Quizplus · Accepted Answer

Crowding out refers to the government borrowing so much money that it causes interest rates to rise, which decreases private borrowing and therefore reduces investment. This occurs because of an increase in demand for loanable funds, which drives up the interest rate. Choice A is incorrect because higher interest rates caused by restrictive monetary policy reduce both investment and consumption spending. Choice B is incorrect because higher interest rates caused by restrictive monetary policy do not necessarily increase saving, but they do reduce consumption spending. Choice D is incorrect because government budget deficits usually result in higher interest rates, not lower interest rates.

Crowding Out Can Best Be Defined as