GED Social Studies TestEconomicsHard
A national government is considering increasing its budget deficit by borrowing more money to fund a large-scale infrastructure project, such as building new high-speed rail lines across the country. Economists are debating the potential impact of this increased government borrowing on private investment. This concern is most closely related to which economic concept?
- ACrowding out
- BPhillips curve
- CComparative advantage
- DMultiplier effect
Show answer & explanationAnswer & explanation
Correct answer: A. Crowding out
Crowding out occurs when increased government borrowing drives up interest rates, making it more expensive for private businesses to borrow and invest, thus 'crowding out' private investment. This is a common concern when governments significantly increase their budget deficits.
Why the other options are wrong
- B. The Phillips curve illustrates the inverse relationship between unemployment and inflation.
- C. Comparative advantage explains why countries specialize in producing goods where they have lower opportunity costs.
- D. The multiplier effect describes how an initial change in spending can lead to a larger change in overall economic activity.
Crowding Out
A situation where increased public sector spending drives down or even eliminates private sector spending. This can occur when government borrowing raises interest rates, making private investment less attractive.
- Occurs when government borrowing increases
- Leads to higher interest rates
- Reduces private investment and consumption
Memory trick: Government debt can PUSH private investment ASIDE.