Question

. Which of the following describes crowding out accurately? A) Government, businesses and consumers all borrow...

. Which of the following describes crowding out accurately? A) Government, businesses and consumers all borrow more money which creates more debt. B) The government borrows more money which leaves less money for businesses to borrow and spend. C) Banks reduce interest rates which causes government, businesses and consumers to borrow less. D) The government raises taxes and as a result consumers and businesses spend less.

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Answer #1

Ans: B) The government borrows more money which leaves less money for businesses to borrow and spend.

Explanation:

When government increases spending through borrowing then the market interest rate will increase. It leads reduction in  personal consumption of goods and services and investments by private investors . Because the government borrows more money which leaves less money for businesses to borrow and spend. It is called crowding out effect

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