Question

    Which of the following statements accurately describes

    the concept of "crowding out" in the context of fiscal policy?
    A An increase in government spending leads to an increase in private investment. Correct Answer Incorrect Answer
    B A decrease in government spending leads to an increase in private investment. Correct Answer Incorrect Answer
    C An increase in government spending leads to a decline in private investment. Correct Answer Incorrect Answer
    D A decrease in government spending leads to a decline in private investment. Correct Answer Incorrect Answer
    E Government spending has no effect on private investment. Correct Answer Incorrect Answer

    Solution

    Crowding out occurs when increased government spending leads to a reduction in private investment because government borrowing drives up interest rates.

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