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Public Debt and Crowding Out

1 UPSC Prelims MCQs tagged "Public Debt and Crowding Out". Free practice with answer keys, explanations, and timed mock tests on Anantam IAS.

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Which one of the following best defines ‘crowding out’ in the context of public…
Which one of the following best defines 'crowding out' in the context of public debt?
1. AHigh government borrowing increases interest rates and thereby reduces private sector investment.
2. BHigh government borrowing increases income tax rates and thereby decreases disposable income of citizens.
3. CHigh government borrowing leads to decreased subsidies for poor people.
4. DHigh government borrowing leads to higher indirect taxes.
Answer and explanation
Correct answer: A
The crowding-out effect occurs when heavy government borrowing absorbs available loanable funds and pushes up interest rates. Costlier credit then discourages private firms from borrowing and investing. The other options describe tax or subsidy effects, not the interest-rate channel that defines crowding out.
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Indian Economy UPSC GPSC-2026 Medium