Which Statement Best Explains the Crowding-Out Effect

question 87

Multiple Choice

Which statement best explains the crowding-out effect?

• A) An increase in government expenditures decreases the interest rate and so increases investment spending.
• B) An increase in government expenditures increases the interest rate and so reduces investment spending.
• C) A decrease in government expenditures increases the interest rate and so increases investment spending.
• D) A decrease in government expenditures decreases the interest rate and so reduces investment spending.

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Definitions:

Cash Paid

The total amount of cash disbursed by a company for various purposes, such as operating expenses, purchasing assets, or debt repayment.

Premium on Bonds Payable

The amount by which the cash received from issuing bonds exceeds their face value, signifying an interest rate lower than the market rate.

Adjunct Liability Account

An account that is associated with a liability and increases its amount, unlike a contra liability account which reduces it.

Call Option

A financial contract giving the buyer the right but not the obligation to buy an asset at a specified price within a certain period.