The crowding-out effect from government borrowing to ﬁnance the public debt is reduced when
A) the economy is experiencing a period of high inﬂation.
B) the economy is operating at the full-employment level of output.
C) public investment complements private investment.
D) public investment substitutes for private investment.

Question

Quizplus · Accepted Answer

When public investment complements private investment, it can increase overall investment and aggregate demand, thereby reducing the crowding-out effect of government borrowing. This can occur because public investment may create new opportunities for private investment or stimulate positive externalities that benefit private investors. On the other hand, when public investment substitutes for private investment, it competes with and displaces private investment, leading to a smaller effect on overall investment and a potentially larger crowding-out effect.

The Crowding-Out Effect from Government Borrowing to ﬁNance the Public