Q. The term “Crowding out Effect”, often seen news, is related to which of the following?
In some situations, such as high budget deficit etc, there is rise in government borrowing from the market.
- Due to the excessive borrowing by the government from the market, there is little credit left for private sector to borrow.
- As a result, interest rate rises, making borrowings by private sector costly and leading to decline in private investment. This is known as crowding out effect.
- The private borrowing and subsequent private investment is discouraged.
Source: The Hindu