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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