PYQ 2026 Q94 · RaahUPSC PYQ

2026 · EconomyPrevious Year Question

Q94.

Which one of the following best describes the 'Crowding Out Effect? in the context of fiscal policy ?

A. A situation where private investment increases due to increased Government spending

B. A situation where Government borrowing leads to higher interest rates, which reduces private investment

C. A situation where an increase in taxes leads to increased private sector investment

D. A situation where Government spending has no impact on aggregate demand

Answer

B

Explanation

Crowding out occurs when increased government borrowing raises demand for loanable funds, putting upward pressure on interest rates and reducing private investment. It is the classic fiscal-policy crowding-out mechanism. Hence B.