- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 3. Fiscal Policy
- Subject 4. Fiscal Policy Implementation
CFA Practice Question
The crowding-out effect suggests that government borrowing to finance higher expenditures will most likely increase ______.
B. the real interest rate
C. the supply of loanable funds
A. private investment
B. the real interest rate
C. the supply of loanable funds
Correct Answer: B
Government borrowing to finance budget deficits leads to the crowding-out effect which would in turn lead to an increase in the real interest rate, a decrease in the supply of loanable funds, and a decrease in private investment.
User Contributed Comments 3
| User | Comment |
|---|---|
| bravoshieh | Any idea why there is a decrease in the supply of loanable funds? Thought an increase in the real interest rate only drives the supply up? |
| Antoinepo | increase in interest rate comes from the lack of loanable funds |
| Antoinepo | lack of loanable funds comes from the government excessive borrowing |