Question

Government deficits can complicate monetary policy because government borrowing can lead to ________.

1) crowding out, which leads to lower interest rates.
2) crowding out, which leads to higher interest rates.
3) crowding in, which leads to lower interest rates.
4) crowding in, which leads to higher interest rates.

Answer 1

Government deficits can lead to option 2) crowding out, which causes higher interest rates.

Step-by-step explanation:

Government deficits can complicate monetary policy because government borrowing can lead to crowding out, which leads to higher interest rates. When the government needs to borrow money to finance its deficit, it increases the demand for loans, which in turn increases interest rates.

This increase in interest rates can limit the ability of private businesses and individuals to borrow and invest, resulting in crowding out of private investment.