Economics • Economic BasicsMedium
In macroeconomic theory, what does 'Crowding Out Effect' refer to?
A. An increase in private investment caused by expansionary monetary policy.
B. A reduction in private investment resulting from higher interest rates caused by government deficit borrowing.✓ Correct Answer
C. The displacement of domestic goods by cheaper foreign imports.
D. The migration of skilled labor from rural to urban economic sectors.
💡 Solution & Explanation
The crowding out effect occurs when heavy government deficit borrowing drives up domestic interest rates, which subsequently discourages or reduces private sector investment spending. Expansionary monetary policy typically stimulates rather than crowds out private economic activity.
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