Which one of the following best describes the 'Crowding Out Effect' in the context of fiscal policy ?
Show answer
Answer: B. Crowding out happens when government borrowing raises demand for loanable funds, pushing up interest rates and reducing private investment.
Watch for: Students mix up 'crowding out' with 'crowding in'.
Why the other options are wrong
- A. Wrong because that describes crowding in, the opposite effect.
- C. Wrong because higher taxes usually reduce, not raise, private investment.
- D. Wrong because government spending normally does affect aggregate demand.
Source to check: NCERT Class 12 'Introductory Macroeconomics', Chapter 5 'Government Budget and the Economy'
Answer from the provisional UPSC key; it may change when the final key is out. Written and fact-checked by AI against the official key. Spotted a mistake? Report it.