GCEEconomicsPublic Finance2024

The concept of 'crowding out' in public finance refers to a situation where

Agovernment subsidies reduce the cost of production for private firms
Bincreased government borrowing raises interest rates and reduces private sector investmentCORRECT
Cexcess taxation leads to a decline in consumer spending
Da budget surplus is used to retire outstanding public debt
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Why the answer is B, and why the others tempt you.
Crowding out occurs when government borrowing from the financial market increases the demand for loanable funds, thereby pushing up interest rates. Higher interest rates make borrowing more expensive for private firms, discouraging private investment. This reduces the overall effectiveness of expansionary fiscal policy.
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