CFA Practice Question

There are 341 practice questions for this study session.

CFA Practice Question

The crowding-out effect suggests that government borrowing to finance higher expenditures will most likely increase ______.

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
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