Answer:
the options are missing, so I looked for them:
a. The buying of government bonds leads to lower interest rates, thereby reducing private investment.
b. The selling of government bonds leads to higher interest rates, thereby reducing private investment.
c. The selling of government bonds leads to lower interest rates, thereby reducing private investment.
d. The buying of government bonds leads to higher interest rates, thereby reducing private investment.
the answer is:
b. The selling of government bonds leads to higher interest rates, thereby reducing private investment.
Explanation:
The crowding out effect happens when the government increases its spending level in order to engage in an expansionary fiscal policy but someone needs to pay for this extra spending. In order for the government to finance their spending, they have to choose to either increase taxes or issue more debt. When they issue more debt, they end up decreasing private investment since money that could be used by private companies is used by the government instead.
The right description of the crowding-out effect should be when the government bonds should be sale off.
It should arise at the time when the government raised the level of spending so the engagement to the expansionary fiscal policy should be considered. However, the same should be paid additional spending. And, for financing the spending, the selection should be done with respect to the increment of the taxes or issuing additional debt.
Therefore, the option b is correct.
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