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Economics › Budget, Fiscal Policy

Economics › Budget, Fiscal Policy

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Which one of the following best describes the ‘Crowding Out Effect’ in the context of fiscal policy?

Options

(a)

A situation where private investment increases due to increased Government spending

(b)

A situation where Government borrowing leads to higher interest rates, which reduces private investment

(c)

A situation where an increase in taxes leads to increased private sector investment

(d)

A situation where Government spending has no impact on aggregate demand

Answer

(b) A situation where Government borrowing leads to higher interest rates, which reduces private investment