The contraction of private investment spending due to deficit spending by the Government is called
- A.crowding out
- B.crowding in
- C.pump priming
- D.dumping
Correct answer
Explanation
The correct answer is A, crowding out. When the government runs a deficit, it borrows heavily from the same pool of savings that private firms use, so interest rates rise and private investment falls. This squeezing out of private spending by public borrowing is called the crowding out effect. It is the main argument against high fiscal deficits: if the state absorbs most of the savings, businesses find loans costlier and invest less, and the boost from government spending is partly cancelled. It is also why India's fiscal rules, such as the FRBM Act, 2003, aim to keep the deficit in check. B is wrong, because crowding in is the opposite, when public spending on roads, ports and the like encourages more private investment. C is wrong, because pump priming means government spending during a slump to restart demand, not the fall in private investment. D is wrong, because dumping is selling exports abroad below their home price or cost, a trade issue met with anti-dumping duty. Exam tip: deficit borrowing, higher interest rates, less private investment; that is crowding out.
Practice Questions
View allAccording to the law of diminishing marginal utility, as the amount of a good consumed increases, the marginal utility of that good tends to
- A.improve
- B.diminish
- C.remain constant
- D.first diminish and then improve
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Each extra unit of a good gives a consumer less additional satisfaction than the unit before it, so marginal utility falls as consumption rises.
Read the full explanation →Consider the following statements about impact of tax : 1. A tax is shifted forward to consumers if the demand is inelastic relative to supply. 2. A tax is shifted backward to producers if the supply is relatively more inelastic than demand. Which of the statements given above is/are correct?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
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The burden of a tax falls more heavily on whichever side of the market is less elastic, the side that cannot easily walk away.
Read the full explanation →UBI, as an alternative for subsidies in poverty alleviation, stands for
- A.Union Basic Income
- B.Undefined Basic Income
- C.Unconditional Basic Income
- D.Universal Basic Income
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UBI is the idea of paying every citizen a fixed sum of money regularly, without conditions, in place of a large number of separate subsidies and welfare schemes.
Read the full explanation →Who among the following is the Chairman of the Fourteenth Finance Commission?
- A.C. Rangarajan
- B.Vijay Kelkar
- C.Y. V. Reddy
- D.Rakesh Mohan
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The Fourteenth Finance Commission, set up in 2013 for the award period 2015-2020, was chaired by Y. V. Reddy, a former Governor of the Reserve Bank of India.
Read the full explanation →Why was constitutional amendment needed for introducing GST?
- A.States were not willing to agree with the Union for introduction of GST without amendment in the Constitution.
- B.GST was to be implemented on concurrent base and Article 246 was inadequate for such a case.
- C.The Empowered Committee of Finance Ministers had recommended for constitutional amendment.
- D.The GST Council had recommended for constitutional amendment so that its power enhances.
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GST is levied by the Union and the States together on the same supply, and Article 246, which splits taxing powers between them through separate lists, did not allow such a concurrent tax.
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