Practice question · Multiple choice
Why might a large debt-financed stimulus partially undermine itself?
Hints
- Who else competes for the economy’s savings?
- What happens to interest rates when a huge new borrower enters the credit market?
Show the answer
B. Heavy public borrowing can crowd out private investment
Why
The state and firms fish in the same pool of savings. Massive public borrowing bids up interest rates, and marginal private projects die, crowding out clawing back part of the stimulus.
Practise Fiscal Policy
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