Crowding out occurs when expansionary fiscal policy causes
Correct answer: A. Higher interest rates that reduce private investment
- A. Higher interest rates that reduce private investment
- B. Lower interest rates that increase private investment
- C. Higher exports that reduce domestic production
- D. Lower prices that increase the real money supply
Explanation
Government borrowing can raise the demand for loanable funds and put upward pressure on interest rates. Higher rates may then reduce private investment, which is known as crowding out.
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