APFIVE Government Borrowing and the Crowding-Out Effect
Assume a government finances a large increase in infrastructure spending entirely through borrowing. If the economy is operating at full employment, what is the most likely impact on the private sector?
A
Increased capital formation due to complementary public investments
B
Reduced capital formation as higher interest rates discourage private investment
C
No change in capital formation as saving automatically increases
D
Reduced capital formation due to lower interest rates
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