Asked by Jeeva Senthilnathan on Jul 08, 2024
Verified
Which of the following can be called a "crowding-out" effect?
A) Government borrowing crowds out private saving.
B) Exports crowd out government borrowing.
C) Government borrowing crowds out private investment.
D) Private consumption crowds out private investment.
Crowding-Out Effect
Describes a situation in economics where increased public sector spending reduces or eliminates private sector spending, often due to higher interest rates or borrowed funds.
Private Saving
The portion of individual or household income that is not spent on consumption but saved for future use.
Private Investment
The expenditure by businesses on capital goods, such as machinery and buildings, and changes in inventories.
- Articulate the crowding-out and crowding-in effects, analyzing their effects on the mobilization of private investment and on fostering economic growth.
Verified Answer
ML
Miles LatimerJul 13, 2024
Final Answer :
C
Explanation :
The crowding-out effect refers to the concept where a government's increased borrowing leads to a decrease in private investment. This is because when the government borrows more, interest rates increase, which makes it more expensive for businesses to borrow money to invest in their operations. Therefore, option C - government borrowing crowds out private investment - is the best choice for a crowding-out effect. The other options do not fit the definition of crowding-out as they do not involve a decrease in private investment due to government borrowing or increased spending.
Learning Objectives
- Articulate the crowding-out and crowding-in effects, analyzing their effects on the mobilization of private investment and on fostering economic growth.