A government announces a massive infrastructure project funded by a significant increase in its market borrowing. Simultaneously, the private sector is also looking to borrow heavily to expand capacity, while the commercial banking system has limited excess liquidity. What is the most likely macroeconomic consequence of this scenario?

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Economics · Macroeconomics

Verified Solution4 OptionsUpdated: October 2026👁️1 View

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Correct answer

'Crowding Out' will occur, where high government borrowing pushes up bond yields, making credit more expensive for the private sector.

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Answer 1

The treasury will directly print legal tender currency notes to avoid any market borrowing mechanism.

Answer 2

The central bank will sharply increase the Cash Reserve Ratio (CRR) to absorb any remaining loanable funds from the public.

Answer 3

'Crowding Out' will occur, where high government borrowing pushes up bond yields, making credit more expensive for the private sector.

Answer 4

Market interest rates will crash immediately due to high public demand for government assets.

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