UPSC CSE Prelims
Question 80
Which one of the following best describes the 'Crowding Out Effect' in the context of fiscal policy?
View correct answer and explanation
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.