In a loanable-funds market, substantial government borrowing may cause crowding out when it:
Correct answer: A. Raises interest rates and reduces private investment
- A. Raises interest rates and reduces private investment
- B. Lowers interest rates and expands private investment
- C. Reduces taxes and increases household saving
- D. Raises exports and improves the trade balance
Explanation
Government borrowing can increase demand for loanable funds, putting upward pressure on interest rates and discouraging some private investment. This displacement of private borrowing is known as crowding out.
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Government revenue and expenditure are analysed through taxation, public borrowing, budgets, subsidies, transfers and public debt. The topic explains how fiscal policy affects resource allocation, income distribution, economic stability and growth, while distinguishing direct from indirect taxes, progressive from regressive taxation, and public goods from goods supplied by private markets.
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