Crowding out refers to
A) excess demand for a good of which there is a shortage
B) the negative effect of government budget deficits on investment
C) consumers saving tax cuts in anticipation of future tax increases
D) decisions that appear optimal in one period and sub-optimal at a later time
E) the implementation lag associated with fiscal policy

Question

Quizplus · Accepted Answer

Crowding out refers to the negative effect of government budget deficits on investment. When the government runs a budget deficit, it borrows money from the private sector which increases the demand for savings, raising interest rates. This, in turn, reduces investment spending, lowering economic growth. This is referred to as "crowding out" because government borrowing "crowds out" private investment.

Crowding Out Refers to