Economics • Economic BasicsMedium
In macroeconomic theory, what does the term 'Crowding Out Effect' refer to?
A. An increase in private investment caused by an increase in government spending.
B. A reduction in private investment resulting from an increase in government borrowing and higher interest rates.✓ Correct Answer
C. The displacement of domestic goods by cheaper foreign imports.
D. The elimination of small firms by monopolistic corporations in a competitive market.
💡 Solution & Explanation
The crowding out effect occurs when expansive fiscal policy involving heavy government borrowing drives up domestic interest rates, which subsequently discourages private sector investment spending. Erroneous choices incorrectly describe scenarios where government spending stimulates private capital formation or focus entirely on international trade imbalances. Understanding this phenomenon is crucial for analyzing fiscal deficits and monetary policy transmission mechanisms in economics.
More Economics Economic Basics questions
- When examining the regional disparities in per capita income within Arunachal Pradesh, which underlying…
- What does the 'Gini Coefficient' measure in welfare economics?
- In the context of macroeconomic equilibrium, what does an autonomous expenditure multiplier measure when the…
- How does cost-push inflation fundamentally differ from demand-pull inflation?
- Evaluate the theoretical properties of the Mundell-Fleming model, also known as the open-economy IS-LM model.…