What is crowding out effect 1 Increase in interest rate due to increase in fiscal deficit which furt...........

Economic Affairs Public Finance and Debt Management

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What is crowding out effect?

1.Increase in interest rate due to increase in fiscal deficit, which further leads to decrease in private investment

2.Crowding out increases the vulnerability of economy and may lead to economic shocks.

Choose the correct statements:

Only1

Only 2

Both 1 and 2

None of the above

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Explanation:

Only1

The crowding-out effect typically refers to the scenario where increased government spending leads to higher interest rates, which in turn reduces private investment. It doesn't necessarily lead to increased vulnerability or economic shocks, as stated in statement 2.