According to classical theory, an increase in government spending by increasing

Question

According to classical theory, an increase in government spending by increasing a fiscal deficit gives rise to crowding out of private investment due to: A. Sales of bonds from the Federal Treasury leads to an increase in their suppy thereby reducing their price and increasing interest rate. B. An increse in income tax C. An increase in price level D. A and C According to classical theory, an increase in government spending by increasing a fiscal deficit gives rise to crowding out of private investment due to: A. Sales of bonds from the Federal Treasury leads to an increase in their suppy thereby reducing their price and increasing interest rate. B. An increse in income tax C. An increase in price level D. A and C A. Sales of bonds from the Federal Treasury leads to an increase in their suppy thereby reducing their price and increasing interest rate. B. An increse in income tax C. An increase in price level D. A and C

Explanation / Answer

Crowding out of private investment implies a decrease in private investment as private business borrows less to invest because of rise in interest rate as government has increased its borrowing to finance fiscal deficit leading to increase in interest rate.

So,

According to classical theory, an increase in government spending by increasing a fiscal deficit gives rise to crowding out of private investment due to Sales of bonds from the Federal Treasury leads to an increase in their suppy thereby reducing their price and increasing interest rate.

Hence, the correct answer is the option (A).

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