Question

What is the economic term for the situation where an increase in government borrowing to finance public expenditure leads to an increase in interest rates and a decrease in private investment?

• A. The multiplier effect.
• B. The liquidity trap.
• C. The crowding-out effect.
• D. The paradox of thrift.

Answer 1

Answer:

C. The crowding-out effect.

• The crowding-out effect occurs when increased government borrowing for public spending competes with private firms for available loanable funds, driving up interest rates and reducing private investment.