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The government is running a budget balance of zero when it decides to increase education spending...

The government is running a budget balance of zero when it decides to increase education spending by $100 billion and finance the spending by selling bonds. Private sector’s investment spending will ___C___. The ___D___ in government borrowing crowded out in private investment spending. This is called the crowding-out effect. Fill C and D.

fall; decrease

fall; increase

rise; decrease

rise; increase

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Answer #1

Answer: correct answer is fall, decrease

When government spending will increase and government is trying to selling his bond. So more money will be in hand of government by selling bonds. And private private sector investment spending will reduce because government will sell bonds to private sector and take money from them . So In return their investment spending will reduce and the decrease  in government borrowing will crowd out to private investors from market because government borrowing to finance the economy increase the budget deficit. It will cause increase in interest rate. Higher interest rate will crowd out the private investors from market.

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