CA Foundation P4 · Chapter 7 · Question 15 of 15
'Crowding out' refers to a situation where:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Increased government borrowing raises interest rates and reduces private investment
Explanation
When government borrows heavily to finance a deficit, demand for loanable funds rises, pushing up interest rates. Higher rates discourage private investment, partially offsetting the expansionary effect of fiscal policy.
More Public Finance MCQs
- Q2Pure public goods are characterised by:
- Q3The 'free rider' problem means that:
- Q4When the production of a good generates a negative externality such as pollution, the free market will:
- Q5A tax imposed on a polluting firm equal to the marginal external cost of its activity is known as a:
- Q6Which of the following is a merit good?