Question

Which of the following statements is correct? Large budget deficits may reduce private investment, thereby stifling economic growth. If most of the deficit is spent on current consumption, we expect the economy's productivity to increase. The government must buy bonds from the public to finance its spending. Crowding out refers to the decrease in private investment stemming from an increase in consumer spending.

Answer 1

Answer:

Large budget deficits may reduce private investment, thereby stifling economic growth.

Explanation:

Crowding out is a term that describes the situation that occurs when the increase in involvement of the government in a particular sector of the market economy, has a direct effect on the remaining market, either on the demand or supply side of the market.

Therefore, crowding out effects which can be caused as a result of government financing large budget deficit, thereby, making them to be involved on a particular sector of the economy, will result to government needing more capital, hence encouraging savings, through increased in interest rate, or selling of bonds and treasury bills with attractive returns, which will leads to reduction in private investment spending, such that it affects negatively the increase in inital total investment.