The contraction of private investment spending due to deficit spending by the Government is called
[amp_mcq option1=”crowding out” option2=”crowding in” option3=”pump priming” option4=”dumping” correct=”option1″]
This question was previously asked in
UPSC CDS-1 – 2023
– Increased government borrowing increases the demand for funds in the financial markets.
– Increased demand for funds, with a given supply, leads to higher interest rates.
– Higher interest rates increase the cost of borrowing for private firms and individuals.
– This higher cost discourages private investment spending (e.g., on new factories, equipment, or housing), hence ‘crowding out’ private investment.