Which one of the following best describes the 'Crowding Out Effect' in the context of fiscal policy?

The 'Crowding Out Effect' is an economic theory which argues that rising public sector spending drives down or even eliminates private sector spending. When the government increases its spending and finances it by borrowing from the market, the demand for loanable funds increases. This pushes up the interest rates in the economy.

Higher interest rates make borrowing more expensive for private businesses and individuals, leading to a reduction (or "crowding out") of private investment and consumption. Therefore, Option B is the correct description. In contrast, when government spending stimulates and increases private investment, it is known as the 'Crowding In Effect'.