The crowding-out effect refers to the tendency of
A) the additional borrowing accompanying larger budget deficits to increase interest rates and reduce private spending.
B) higher future taxes accompanying budget deficits to reduce private consumption.
C) the inflation rate to rise when the unemployment rate is low.
D) increases in private savings to reduce interest rates and, thereby, crowd-out government expenditures.

Question

Quizplus · Accepted Answer

The crowding-out effect refers to government borrowing for budget deficits that increase interest rates, making it more expensive for the private sector to borrow and invest. Higher interest rates discourage private spending and investment, reducing overall economic activity. Therefore, options B, C, and D are incorrect.

The Crowding-Out Effect Refers to the Tendency of