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Home› UPSC CSE› Prelims GS Paper I› 2026 questions› Question 80

UPSC CSE Prelims

Subject: Economy Chapter: Fiscal Policy

2026 PYQ

Question 80

Which one of the following best describes the 'Crowding Out Effect' in the context of fiscal policy?

Choose one answer AA situation where private investment increases due to increased Government spending BA situation where Government borrowing leads to higher interest rates, which reduces private investment CA situation where an increase in taxes leads to increased private sector investment DA situation where Government spending has no impact on aggregate demand

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Correct answer: B

Correct Option: B Explanation: Government borrowing can increase demand for loanable funds, raise interest rates and displace or “crowd out” some private investment. Option-wise Analysis: A: Incorrect - More private investment from public spending is an example of possible crowding-in, not crowding-out. B: Correct - Public borrowing that raises interest rates and lowers private investment is the standard crowding-out mechanism. C: Incorrect - Higher taxes do not automatically increase private investment and do not describe this borrowing channel. D: Incorrect - The claim of no aggregate-demand impact is unrelated to the defined displacement of private investment.

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