Question

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

Answer 1

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.