Question map
Not attempted Correct Incorrect ★ Bookmarked
Loading…
Q76 (CDS-I/2023) Economy › Government Finance & Budget › Fiscal deficit concepts Answer Verified

The contraction of private investment spending due to deficit spending by the Government is called

Result
Your answer: —  Â·  Correct: A
Explanation

The contraction of private investment spending due to government deficit spending is known as 'crowding out'. When the government borrows excessively to finance its fiscal deficit, it increases the demand for loanable funds, which exerts upward pressure on interest rates [4]. Higher interest rates make borrowing more expensive for the private sector, thereby discouraging investment in capital and equipment [2]. Additionally, because government bonds are considered risk-free, they compete with corporate instruments for the available supply of savings [2]. If the supply of savings is relatively fixed, the government's increased share 'displaces' or 'crowds out' private borrowers from the financial markets [5]. This phenomenon is particularly noted when government spending is directed toward revenue expenditure rather than productive infrastructure [1]. Conversely, 'crowding in' occurs when public spending stimulates private activity, and 'pump priming' refers to initial government investment to spark broader economic recovery [3].

Sources

  1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Crowding Out > p. 117
  2. [4] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Findings from previous years Economic Surveys > p. 159
  3. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 4.8 Perspectives on Deficit and Debt > p. 158
  4. [5] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Debt > p. 79
  5. [3] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Findings from previous years Economic Surveys > p. 160
How others answered
Each bar shows the % of students who chose that option. Green bar = correct answer, blue outline = your choice.
Community Performance
Out of everyone who attempted this question.
58%
got it right
✓ Thank you! We'll review this.

SIMILAR QUESTIONS

CDS-I · 2021 · Q111 Relevance score: 5.93

The increase in private investment spending induced by the increase in Government spending is known as

CDS-I · 2021 · Q34 Relevance score: -2.01

The excess of total expenditure of Government over its total receipts, excluding borrowings, is known as

CAPF · 2018 · Q125 Relevance score: -2.27

If farmers’ loans are waived in India, how will it affect the aggregate demand in the economy? L. Private consumption impact via increase in private sector net wealth 2. Public sector impact via changes in government expenditure / taxes 3. Crowding-out impact via higher borrowings by State Governments 4. Crowding-in impact via higher credit availability as bank NPAs fall Select the correct answer using the code given below.

CDS-II · 2015 · Q60 Relevance score: -2.74

Private investment in Indian agriculture is mostly on labour-saving mechanization. This could be a response to

IAS · 2002 · Q87 Relevance score: -3.78

With reference to the Indian Public Finance consider the following statements: 1. External liabilities reported in Union Budget are based on historical exchange rates 2. The continued high borrowing has kept the real interest rates high in the economy 3. The upward trend in the ratio of Fiscal Deficit to GDP in recent years has an adverse effect to private investments. 4. Interest payments is the single largest component of the non-plan revenue expenditure of the Union Government. Which of these statements are correct ?