Chapter 5R, Problem 24MCQ

To determine

The correct option that defines the reason for crowding out due to the changes that occur in the loan-able fund market.

Answer to Problem 24MCQ

Option b is correct.

Explanation of Solution

Explanation for the correct option:

b.

The demand for loanable funds increases if there is an increase in the government deficit. Crowding out occurs when the deficit increases and investment spending decreases. Therefore, option b is correct.

Explanation for incorrect options:

a.

Due to the rise in loanable fund demand, the interest rates are increased to attain equilibrium. Therefore, option a is incorrect.

c.

A decrease in demand for loanable funds will not lead to a crowding out of the situation. Therefore, option c is incorrect.

d.

The supply of loanable funds decreases as demand increases. Therefore, option d is incorrect.

e.

Crowding out occurs due to the increase in government deficit, a decrease in the supply of funds is not a direct cause. Therefore, option e is incorrect.

Economics Concept Introduction

Crowding out: Investment spending reduces due to a rise in the government budget deficit. This reduction in investment spending due to a negative budget balance refers to crowding out.