6. Crowding-out effect

Which of the following is a correct description of the crowding-out effect of deficit spending?

The selling of government bonds leads to higher interest rates, thereby reducing private investment.

The buying of government bonds leads to lower interest rates, thereby reducing private investment.

The buying of government bonds leads to higher interest rates, thereby reducing private investment.

The selling of government bonds leads to lower interest rates, thereby reducing private investment.

The following graph shows the demand for private investment.

Show the crowding-out effect of deficit spending on the demand for investment by moving the dot, dragging the investment demand (ID) curve, or both.

Note: Select and drag the curve to the desired position. The curve will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther.

IDPoint Along IDINTEREST RATEINVESTMENTID

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