Economics • Economic BasicsMedium
Which of the following describes 'Crowding Out Effect' in fiscal economics?
A. An increase in government spending leads to a reduction in private investment.✓ Correct Answer
B. An increase in exports reduces domestic consumption of goods.
C. A rise in money supply leads to an increase in interest rates.
D. Higher corporate taxes lead to lower government revenues.
💡 Solution & Explanation
The crowding out effect describes an economic phenomenon where expansive government borrowing to finance fiscal deficits drives up market interest rates, thereby discouraging private investors from undertaking capital expenditures. Other scenarios involving international trade balances or independent monetary policy adjustments do not capture this specific interaction between public sector borrowing and private investment. Macroeconomists analyze this mechanism closely to evaluate the net efficacy of deficit-financed fiscal stimulus packages.
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