CIMA BA1 · Chapter 2 · Question 10 of 10
The term 'crowding out' in macroeconomics refers to:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Increased government borrowing pushing up interest rates and so reducing private sector investment
Explanation
Crowding out occurs when government borrowing to finance spending competes with the private sector for loanable funds. Interest rates rise and some private investment is displaced, reducing the net effect of the fiscal expansion on aggregate demand.
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