The Term "Crowding Out" Refers to the Phenomenon That Occurs

question 31

Multiple Choice

The term "crowding out" refers to the phenomenon that occurs when increased government
Spending

• A) raises the price level and reduces consumption.
• B) leads to higher interest rates which reduces private investments.
• C) leads to higher bond prices which decreases the demand for Treasury bonds.
• D) leads to increased budget deficits that ultimately warrant increases in income taxes.

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Definitions:

Real Rate of Interest

The interest rate that has been adjusted to remove the effects of inflation; reflects the true cost of borrowing.

Nominal Rate

The rate of interest before adjustments for inflation, representing the face value rate agreed upon in financial instruments and agreements.

Inflation Rate

The rate at which the general level of prices for goods and services is rising, eroding purchasing power.

Expected Holding-Period Return

The total return anticipated on an investment over the period it is held, including income and price appreciation.