Question

Crowding out is associated with:

a. an increase in business investment resulting from an increase in government borrowing and higher interest rates.
b. a reduction in business investment resulting from an increase in government borrowing and higher interest rates.
c. an increase in private savings caused by higher future tax liabilities when government increases borrowing.
d. a decrease in government spending caused by a shortage of available credit.

Answer 1

b. a reduction in business investment resulting from an increase in government borrowing and higher interest rates.

Step-by-step explanation:

According to the crowding out theory, when there is an increase in government spending, private spending would be reduced.

When the government borrows, real interest rate would increase and this would reduce private sector spending.

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