ECONOMICS
FISCAL POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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high interest rates crowd out borrowers who cant afford loans in a boom
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housing markets that demand exceeds supply
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government borrowing forces out private borrowing in a recession
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None of the above
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Detailed explanation-1: -The crowding out effect is a theory that suggests that increased government spending ultimately decreases private sector spending. This is due to the higher cost of loans and reduced income that can result when the government increases taxes or borrows by selling Treasuries to obtain more revenue for its own spending.
Detailed explanation-2: -When governments borrow, they compete with everybody else in the economy who wants to borrow the limited amount of savings available. As a result of this competition, the real interest rate increases and private investment decreases. This is phenomenon is called crowding out.
Detailed explanation-3: -Crowding out is a phenomenon that occurs when increased government involvement in a sector of the market economy substantially affects the remainder of the market, either on the supply or demand side of the market.
Detailed explanation-4: -What is Crowding Out Effect. Definition: A situation when increased interest rates lead to a reduction in private investment spending such that it dampens the initial increase of total investment spending is called crowding out effect.
Detailed explanation-5: -If the crowding-out effect is real, that would undermine expansionary fiscal policy. The theory argues that government spending reduces private spending in the economy. That would mean that increased government spending would do nothing to boost, or could even reduce, economic growth in the long term.