The concept of 'Crowding Out' is more likely to occur when:
A. The economy is in a deep recession with excess capacity
B. The economy is near full employment and interest rates rise due to government borrowing
C. There is a liquidity trap
D. Monetary policy is highly accommodative
Answer: Option B
Solution (By JKSSB Mock Tests)
Crowding out is more pronounced when the economy is close to full employment, as higher government borrowing raises interest rates and reduces private investment.
Explanation:
The classical dichotomy is the proposition that real variables (output, employment, relative prices) are determined independently of nominal variables and that money is neutral in the long run.
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