UPSC 2026 › Indian Economy › Fiscal Policy & Budget

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UPSC 2026 · Q59 · Indian Economy › Fiscal Policy & Budget · Save

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
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Answer: (b) A situation where Government borrowing leads to higher interest rates, which reduces private investment