Crowding out effect is associated with:
Options
AIncrease in Private Investment
BDecrease in Private Investment due to high Public Expenditure
CIncrease in Exports
DDecrease in Imports
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Public FinancePYQ - May 2022 (Inter)Question 129 of 20
All Questions Correct Answer
✅ Option b — Decrease in Private Investment due to high Public Expenditure
All Options:
- AIncrease in Private Investment
- BDecrease in Private Investment due to high Public Expenditure
- CIncrease in Exports
- DDecrease in Imports
Detailed Solution & Explanation
To understand the crowding out effect, let's break it down:
• The crowding out effect occurs when government spending or borrowing increases, leading to higher interest rates.
• As a result of these higher interest rates, private investment becomes more expensive, causing a decrease in private investment.
• This happens because businesses and individuals are less likely to borrow money for investment purposes when interest rates are high.
The correct answer is related to a decrease in private investment due to high public expenditure, which is a direct consequence of the crowding out effect.
• Option related to decrease in private investment is correct because it directly reflects the definition of the crowding out effect.
On the other hand, options related to increase in private investment, increase in exports, or decrease in imports are incorrect because they do not accurately describe the crowding out effect, which specifically deals with the relationship between government spending and private investment.
About This Chapter: Public Finance
Paper
Paper 4: Business Economics
Weightage
10%
Key Topics
Fiscal Policy, Budget, Market Failure
This chapter deals with government finances — how the government earns (taxation) and spends (expenditure) money. Key topics include Fiscal Policy, types of taxes (Direct and Indirect), the Union Budget, Public Debt, and the concept of Market Failure and how government intervention corrects it.
View Official ICAI SyllabusExam Strategy Tip
Focus on the difference between Revenue and Capital items in the budget. Understand Fiscal Deficit and its implications. Tax-related MCQs are commonly asked.
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