Final answer:
The term 'crowding out' refers to the situation where increased government spending through borrowing discourages private investment by reducing the financial capital available for such investments.
Step-by-step explanation:
The term "crowding out" refers to the phenomenon where increased government spending leads to a decrease in private investment. This happens because when the government borrows to finance its spending, it increases the demand for financial capital. If private saving and the trade balance remain constant, there will be less financial capital available for private investment, particularly in physical capital.
Therefore, the correct answer to the question is B) Discourages private investment. This effect occurs especially when government borrowing, to finance public investment in physical capital, soaks up available financial capital, leaving less for private investment, which could be more beneficial for economic growth.