Crowding-out results from:
A) An increase in the supply of money and a decrease in the velocity of money
B) A decrease in the supply of money and an increase in the velocity of money
C) The inverse relationship between the supply of money and nominal GDP
D) Deficit financing which increases interest rates and reduces investment

Question

Quizplus · Accepted Answer

Crowding-out occurs due to deficit financing which increases interest rates, leading to a decrease in investment. Higher interest rates make borrowing expensive, which discourages firms and households from investing in new projects. As investment decreases, there is a crowding-out effect where the government's deficit spending reduces private sector investment, and overall economic growth slows down.

Crowding-Out Results From