What is the impact of crowding out?

Question

a. Wages of workers are pushed downward.
b. Governments will default on their bonds.
c. The market price of goods and services increase.
d. Firms and households who borrow have to pay a higher interest rate.

Answer 1

The correct answer is:

d. Firms and households who borrow have to pay a higher interest rate.

Crowding out occurs when government spending leads to a rise in interest rates, which in turn makes borrowing more expensive for firms and households. This can reduce private investment and consumption, as higher interest rates discourage borrowing.