When an increase in government spending leads to a decrease in private spending, it is called:
a. Crowding out.
Explanation:
1. Crowding out occurs when increased government spending in areas like infrastructure projects or welfare programs results in a reduction of funds available for private investment or consumption.
2. This phenomenon typically occurs because the government competes with the private sector for financial resources, causing interest rates to rise and making it more expensive for businesses and individuals to borrow money.
3. As a result, private spending decreases as businesses and individuals scale back their investments and consumption due to higher borrowing costs, ultimately offsetting the initial increase in government spending.
In summary, when government spending crowds out private spending by driving up interest rates and limiting access to financial resources, it is termed as crowding out.
