Question : The crowding-out effect suggests that an increase in government expenditure leads to:
Option 1: A decrease in private investment
Option 2: An increase in private investment
Option 3: No change in private investment
Option 4: An increase in savings
Correct Answer:
A decrease in private investment
Solution : The correct answer is (a) A decrease in private investment.
The crowding-out effect is a theory in economics that suggests that an increase in government spending can lead to a decrease in private investment. This is because when the government spends more money, it has to borrow more money. This increased demand for loans drives up interest rates, making it more expensive for businesses to borrow money to invest. As a result, businesses may decide to invest less money, which can lead to slower economic growth.
The crowding-out effect is not always a bad thing. In some cases, it can be necessary to increase government spending in order to stimulate the economy. However, it is important to be aware of the potential negative consequences of increased government spending, such as the crowding-out effect.
