Question : The concept of "crowding-out effect" in the government budget refers to:
Option 1: A decrease in private investment due to increased government expenditure
Option 2: An increase in private investment due to decreased government expenditure
Option 3: A decrease in government expenditure due to increased private investment
Option 4: An increase in government expenditure due to decreased private investment
Correct Answer: A decrease in private investment due to increased government expenditure
Solution : The correct answer is (a) A decrease in private investment due to increased government expenditure.
The concept of the "crowding-out effect" in the government budget refers to a situation where increased government expenditure reduces or "crowds out" private investment in the economy. This effect occurs when the government borrows funds from the financial market to finance its spending, leading to higher interest rates and increased competition for available funds.
When the government increases its expenditure and borrows from the market, it raises the demand for loanable funds. As a result, interest rates tend to rise because there is a limited supply of funds available. Higher interest rates can discourage private businesses and individuals from borrowing and investing, as the cost of borrowing becomes more expensive.
The crowding-out effect suggests that increased government spending can lead to a decrease in private investment, as businesses and individuals find it more challenging or costly to secure the necessary funds for their own investment activities.
Question : The crowding-out effect refers to:
Option 1: A decrease in private investment due to an increase in government expenditure
Option 2: An increase in private investment due to an increase in government expenditure
Option 3: A decrease in government expenditure due to an increase in private investment
Option 4: An increase in government expenditure due to a decrease in private investment
Question : The crowding-out effect suggests that an increase in government expenditure leads to:
Option 1: A decrease in private investment
Option 2: An increase in private investment
Option 3: No change in private investment
Option 4: An increase in savings
Question : The wealth effect suggests that an increase in the price level leads to:
Option 1: A decrease in consumption expenditure
Option 2: An increase in consumption expenditure
Option 3: A decrease in investment expenditure
Option 4: An increase in investment expenditure
Question : The multiplier effect refers to the:
Option 1: Increase in consumption due to an increase in income
Option 2: Increase in investment due to an increase in consumption
Option 3: Increase in income due to an increase in investment
Option 4: Increase in income due to an initial change in spending
Question : The concept of the multiplier effect suggests that an increase in:
Option 1: Investment expenditure leads to a larger increase in real GDP
Option 2: Consumption expenditure leads to a larger increase in real GDP
Option 3: Government expenditure leads to a larger increase in real GDP
Option 4: Net exports leads to a larger increase in real GDP
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