Which of the following options exemplifies financial crowding out? The government builds new wind turbines. The increase in government demand for steel raises its price, meaning some private companies cannot afford to build new steel machinery. The government builds a new bridge, reducing peak hour traffic wait times. The economy is in a slump, so the government increases spending on road widening projects. The government borrows to invest in defence, therefore placing upward pressure on interest rates. The economy is in a boom, so the government increases corporate profit taxes.
Question
Which of the following options exemplifies financial crowding out?
The government builds new wind turbines. The increase in government demand for steel raises its price, meaning some private companies cannot afford to build new steel machinery.
The government builds a new bridge, reducing peak hour traffic wait times.
The economy is in a slump, so the government increases spending on road widening projects.
The government borrows to invest in defence, therefore placing upward pressure on interest rates.
The economy is in a boom, so the government increases corporate profit taxes.
Solution
The option that exemplifies financial crowding out is: "The government borrows to invest in defence, therefore placing upward pressure on interest rates."
Here's the step by step explanation:
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The government decides to invest in defence and for this, it needs to borrow money.
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To attract lenders, the government offers a higher interest rate on its bonds.
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This increase in interest rates by the government leads to an increase in the overall market interest rates.
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As a result, private companies and individuals find it more expensive to borrow money. This is because they now have to pay a higher interest rate on their loans.
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This situation, where increased government borrowing leads to higher interest rates, which in turn makes borrowing more expensive for the private sector, is known as financial crowding out.
Similar Questions
Which of the following scenarios best illustrates the concept of "crowding out" in economics?Question 3Select one:A.A government increases its borrowing to finance a large infrastructure project, causing interest rates to rise and private investment to decrease.B.High levels of consumer debt reduce household savings, leading to lower investment in the stock market.C.A government implements a new tax policy that encourages businesses to invest more in research and development.D.A central bank raises interest rates to control inflation, leading to reduced consumer spending.
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The crowding-out effect refers to the _______ from _______ in the government's budget deficit.Group of answer choicesdecrease in investment; an increase.increase in consumption; an increase.decrease in consumption; a decrease.decrease in employment; an increase.
Crowding out is most likely to occur with which of the following changes?I. Increase in budget deficit.II. Decrease trade deficit.III. Increase in government spending.IV. Increase in budget surplus.V. Decrease in the real interest rate.Elimination ToolSelect one answerAI only.BIII only.CI and II only.DI and III only.EII and III only.
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