The Crowding-Out Effect Refers To

question 20

Multiple Choice

The crowding-out effect refers to:

• A) higher interest rates and reduced private spending that results from financing federal budget deficits.
• B) higher future taxes accompanying budget deficits to reduce private consumption.
• C) the inflation rate to rise when the unemployment rate is low.
• D) increases in private savings to reduce interest rates and, thereby, crowd-out government

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Definitions:

Fixed Costs

Expenses that do not change in proportion to the level of goods or services produced within a certain period.

Hurdle Rate

The minimum rate of return on a project or investment required by a manager or investor.

Cost of Capital

The rate of return that a company must earn on its project investments to maintain its market value and attract funds.

Cutoff Rate

A specific point or standard used for decision-making, often concerning the minimum accepted return on investment.