Economics · Fiscal Policy

The 'Crowding Out Effect' in macroeconomics occurs when:

Verified Solution4 OptionsUpdated: October 2026👁️1 View

1Foreign capital inflows decrease overall domestic economic activity
2A reduction in personal income tax rates directly decreases private consumption
3Increased government borrowing leads to higher interest rates and reduces private sector spending✓
4Government reduces public debt, leading to an expansion of private investment

Correct answer

Increased government borrowing leads to higher interest rates and reduces private sector spending

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