Question

"Crowding out" occurs when government spending ______.

Options

• Encourages private investment by lowering interest rates

• Raises wages, costs, and interest rates, making private investment expensive

• Directly increases the marginal propensity to consume

• Reduces imports and increases domestic demand

Answer 1

"Crowding out" occurs when government spending raises wages, costs, and interest rates, making private investment expensive.

Explanation:

Heavy government spending uses up workers and materials, pushing up wages and costs. Government borrowing also raises interest rates. This makes private projects too expensive, so government spending replaces private spending, reducing the net multiplier effect.