Question

The crowding-out effect suggests that: 
A. Increases in consumption are always at the expense of saving
B. Increases in government spending will close a recessionary expenditure gap
C. Increases in government spending may raise the interest rate and thereby reduce investment
D. High taxes reduce both consumption and saving

Answer 1

Answer:

The correct option is: C. Increases in government spending may raise the interest rate and thereby reduce investment

Explanation:

The crowding-out effect is a phenomenon in which the increase involvement of the government in a sector of market economy affects the rest of the market. The government spending is termed as crowding out investment. This is because it demands more loanable funds which causes an increase in the interest rates, thereby reducing the investment spending.