The crowding-out effect arises when
A) government lends in the money market, thus decreasing interest rates.
B) government borrows in the money market, thus decreasing interest rates.
C) government lends in the money market, thus increasing interest rates.
D) government borrows in the money market, thus causing an increase in interest rates.

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when the government borrows in the money market, causing an increase in demand for loanable funds which in turn raises interest rates. This makes it more expensive for private firms to borrow and invest, which can ultimately reduce the effectiveness of government spending and hinder economic growth.

The Crowding-Out Effect Arises When