The crowding-out effect arises when:
a. govt borrows in the $ market, thus increase % rates and the net investment spending in the economy
b. govt borrows in the $ market, thus increasing % rates and decreasing investment spending
c. the progressivity of the tax system increases, thus decreasing the % rates and increasing investment spending
d. the progressivity of the tax system decreases, thus decreasing % rates and net investmnet spending
take a shot, a little research first.
To determine the correct answer to this question, let's break down the given options and understand the concept of the crowding-out effect.
The crowding-out effect refers to a situation where increased government borrowing in the financial market leads to higher interest rates and subsequently reduces private investment spending in the economy. This occurs because when the government borrows, it increases the demand for loanable funds, causing the interest rates to rise. As a result, businesses and individuals find it more expensive to borrow money for their own investment projects, leading to a decrease in private investment.
Now, let's analyze the given options:
a. Government borrowing in the $ market, thus increasing interest rates and net investment spending in the economy. This option suggests that increased government borrowing would lead to higher interest rates and increased net investment spending. However, this contradicts the concept of the crowding-out effect because the crowding-out effect would result in a decrease in investment spending, not an increase. Hence, option a can be eliminated.
b. Government borrowing in the $ market, thus increasing interest rates and decreasing investment spending. This option aligns with the definition and concept of the crowding-out effect. Increased government borrowing would lead to higher interest rates, discouraging private investment and causing a decrease in investment spending. Therefore, option b is a plausible answer.
c. The progressivity of the tax system increases, thus decreasing interest rates and increasing investment spending. This option suggests that a more progressive tax system would result in lower interest rates and increased investment spending. However, this scenario does not directly relate to the crowding-out effect. The crowding-out effect is specifically caused by increased government borrowing, not changes in the tax system. Thus, option c can be eliminated.
d. The progressivity of the tax system decreases, thus decreasing interest rates and net investment spending. Similar to option c, this option implies that changes in the tax system would affect interest rates and investment spending. It does not directly address the crowding-out effect stemming from government borrowing. Therefore, option d can also be eliminated.
Based on the analysis, option b, "government borrows in the $ market, thus increasing % rates and decreasing investment spending," aligns with the concept of the crowding-out effect.