Economics · Fiscal Policy
A significant increase in the government's borrowing program to fund large public projects can lead to a phenomenon known as 'Crowding Out'. Which of the following best describes the consequence of this effect on broader market dynamics?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The massive supply of government bonds leads to a fall in G-Sec prices and a rise in yields, which subsequently forces corporate borrowers to pay higher interest rates.✓
- 2Crowding out refers to a situation where the government provides free credit to all private corporations, leading to a total collapse of the banking system's interest income.
- 3It is a regulatory process where the government forbids the private sector from issuing any debt instruments to ensure the success of sovereign schemes.
- 4Crowding out occurs when there are too many banks in the market, causing the market interest rates to drop to zero percent for all types of commercial loans.
Correct answer
The massive supply of government bonds leads to a fall in G-Sec prices and a rise in yields, which subsequently forces corporate borrowers to pay higher interest rates.
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