Crowding Out Practice Test

Private investment falls to zero because any rise in the real interest rate eliminates all private borrowing immediately.

Private investment increases because the spending multiplier shifts loanable funds supply right, lowering the real interest rate.

Private investment decreases because government borrowing raises the real interest rate, increasing firms’ cost of financing new capital.

Private investment increases because government borrowing raises the real interest rate, increasing the profitability of borrowing.

Private investment is unchanged because deficit spending affects only consumption and therefore does not change interest rates.