The situation you described is an example of the crowding-out effect. This occurs when increased government borrowing raises interest rates, which can lead to reduced private investment as borrowing costs for businesses rise.
When the government borrows money, it increases the overall demand for money. If the money supply is held constant, this increased demand will raise the interest rate. Investment may be choked off as the interest rate rises. This is an example of what?
Multiple choice question.
Contractionary fiscal policy
The standardized budget
The recognition lag
The crowding-out effect
1 answer