Question

Crowding out occurs when investment declines because of a budget?

1) Deficit
2) Surplus
3) Balance
4) None of the above

Answer 1

Crowding out occurs when government borrowing reduces the funds available for private investment in physical capital.

Step-by-step explanation:

Crowding out occurs when government borrowing soaks up available financial capital and leaves less for private investment in physical capital. This happens when the government changes from running a budget surplus to running a budget deficit. A larger budget deficit increases the demand for financial capital and reduces the funds available for private investment.