Q. The term “Crowding out Effect”, often seen news, is related to which of the following?

[A] Rise in individual investment

[B] Rise in foreign investment

[C] Rise in borrowing of government

[D] Rise in private sector borrowings

Answer: C

In some situations, such as high budget deficit etc, there is rise in government borrowing from the market.  

  • Due to the excessive borrowing by the government from the market, there is little credit left for private sector to borrow.  
  • As a result, interest rate rises, making borrowings by private sector costly and leading to decline in private investment. This is known as crowding out effect.  
  • The private borrowing and subsequent private investment is discouraged. 

Source: The Hindu