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Which one of the following best describes the 'Crowding Out Effect' in the context of fiscal policy?
Correct Answer: B — A situation where Government borrowing leads to higher interest rates, which reduces private investment
Explanation:
The crowding out effect refers to public borrowing absorbing available funds in financial markets. That pressure can push interest rates upward. Higher borrowing costs then discourage private investment, which is exactly what option (b) says.