Question

The term​ "crowding out" refers to a situation​ where: A. Fed policy increases interest rates and decreases private investment. B. Fed policy decreases interest rates and increases private investment. C. Government spending increases interest rates and decreases private investment. D. Government spending decreases interest rates and increases private investment.

Answer 1

Answer:

The correct option is : C. Government spending increases interest rates and decreases private investment.

Explanation:

The term crowding out refers to a situation of increased interest rates and a decrease in private investment. The government spending is known as the crowding out investments, as it demands more loanable funds and thus leading to increase in the interest rates and a reduction in the private investment spending.

Answer 2

Answer: Option(c) is correct.

Explanation:

Crowding out is a situation where the personal consumption and private investment are reduced because of the increase in government spending and this results in higher interest rate.

This is caused by an expansionary fiscal policy that is financed either by increasing taxes or borrowing or both.

So, this expansionary fiscal policy shifts the IS curve rightwards, which raises the interest rate and reduced private investment.