In the context of budget deficits, what is crowding out?

(A) when government borrowing leads to higher interest rates and corresponding decreases in private investment

(B) when a multiplier effect magnifies the effect of increases in income and decreases in consumer spending

(C) when government spending encourages additional levels of consumption and investment from the private sector

(D) when budget surpluses cause firms to undertake increased levels of investment

Question

Business

Damion Lopez

17 June, 03:03

In the context of budget deficits, what is crowding out?

(A) when government borrowing leads to higher interest rates and corresponding decreases in private investment

(B) when a multiplier effect magnifies the effect of increases in income and decreases in consumer spending

(C) when government spending encourages additional levels of consumption and investment from the private sector

(D) when budget surpluses cause firms to undertake increased levels of investment

+3

Answers (1)

Know the Answer?

Devan · Answer 1

(A) when government borrowing leads to higher interest rates and corresponding decreases in private investment.

Explanation:

Crowding out effect is when the government's involvement is a sector of an economy negatively impacts other players in the economy.

When there's a government deficit, the government borrows and because of the large amount that would be borrowed, interest rates would rise and this would discourage private investment.