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6 August, 14:13

Crowding out occurs when ...

a. investment declines because a budget deficit makes interest rates rise.

b. investment increases because a budget surplus makes interest rates rise.

c. investment increases because a budget surplus makes interest rates fall.

d. investment declines because a budget deficit makes interest rates fall.

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Answers (1)
  1. 6 August, 14:31
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    Answer: Option A

    Explanation: Crowding effect refers to the situation when due to over involvement of government in a sector of economy heavily affects the other sectors of the economy.

    In such a case, government spends on a sector more than it needs. This leads to lack of funding from government on other sectors and thus reduced investment and higher interest rates.

    From the above we can conclude that the correct option is A.
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