Economics • Economic BasicsMedium
In macroeconomic theory, what does 'Crowding Out Effect' imply?
A. An increase in government borrowing decreases private investment due to rising interest rates✓ Correct Answer
B. An increase in exports reduces domestic consumption
C. Government spending crowds out foreign direct investment completely
D. Monetary expansion reduces fiscal deficit
💡 Solution & Explanation
The crowding out effect occurs when expansive government borrowing drives up domestic interest rates, which subsequently discourages and reduces private sector investment spending. It demonstrates how fiscal deficits can indirectly dampen private economic activity through financial market adjustments.
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