AP Macroeconomics Practice Quiz: Crowding Out
Written by AP Content Team, Verified for 2026 AP Exams, Last updated: May 2026
Test your understanding with short quizzes. This quiz has 11 questions to check your progress.
Question 1 of 11
All Questions (11)
A) The adverse effect of increased government borrowing, which leads to decreased levels of interest-sensitive private sector spending.
B) The increase in economic growth that results from government spending on infrastructure.
C) The decrease in the money supply caused by the central bank to fight inflation.
D) The positive effect of government budget surpluses, which leads to increased private investment.
Correct Answer: A
The provided text explicitly defines crowding out as 'the adverse effect of increased government borrowing, which leads to decreased levels of interest-sensitive private sector spending in the short run.'
A) Running a budget surplus and paying down debt.
B) Borrowing to finance spending when in a budget deficit.
C) Implementing contractionary monetary policy.
D) Maintaining a balanced budget for multiple fiscal years.
Correct Answer: B
The text states, 'When a government is in budget deficit, it typically borrows to finance its spending,' and this borrowing is the trigger for the crowding out effect.
A) It increases the supply of loanable funds, shifting the supply curve to the right.
B) It decreases the supply of loanable funds, shifting the supply curve to the left.
C) It increases the demand for loanable funds, leading to a higher equilibrium real interest rate.
D) It decreases the demand for loanable funds, leading to a lower equilibrium real interest rate.
Correct Answer: C
The text explains that the loanable funds market model shows the effect of government borrowing. This borrowing increases the demand for funds, which in turn raises the equilibrium real interest rate.
A) A decrease in the equilibrium real interest rate.
B) An increase in the equilibrium real interest rate.
C) A decrease in the supply of loanable funds.
D) No change in the equilibrium real interest rate.
Correct Answer: B
The text states that a loanable funds market model can be used to show the effect of government borrowing on the 'equilibrium real interest rate,' and that this leads to crowding out. The mechanism is that increased borrowing (demand for funds) pushes the interest rate up.
A) Decreased government spending on social programs.
B) A lower rate of physical capital accumulation.
C) An increase in the national savings rate.
D) A persistent trade deficit with other countries.
Correct Answer: B
The text explicitly states, 'A potential long-run impact of crowding out is a lower rate of physical capital accumulation and less economic growth as a result.'
A) Government purchases.
B) Net exports.
C) Interest-sensitive private sector spending.
D) Transfer payments.
Correct Answer: C
The definition of crowding out specifies that it is the 'decreased levels of interest-sensitive private sector spending' that are adversely affected by the increased government borrowing associated with fiscal policy.
A) By increasing taxes, which reduces consumer spending and business investment.
B) By creating a budget deficit financed by borrowing, which increases the real interest rate.
C) By increasing the money supply, which leads to high inflation and reduced purchasing power.
D) By creating a budget surplus, which takes money out of the private sector.
Correct Answer: B
The text explains that fiscal policy may cause crowding out when the government runs a budget deficit and 'borrows to finance its spending.' This borrowing increases the real interest rate, which in turn crowds out private spending.
A) Government borrowing decreases -> real interest rate falls -> private investment increases.
B) Government borrowing increases -> real interest rate falls -> private investment increases.
C) Government borrowing increases -> real interest rate rises -> private investment decreases.
D) Government borrowing decreases -> real interest rate rises -> private investment decreases.
Correct Answer: C
The provided content outlines a clear chain of events: increased government borrowing leads to a higher equilibrium real interest rate, which in turn results in the crowding out (decrease) of private investment.
A) a higher rate of inflation.
B) a decrease in the national debt.
C) less economic growth.
D) an appreciation of the domestic currency.
Correct Answer: C
The text directly states that a potential long-run impact of crowding out is 'less economic growth as a result' of lower physical capital accumulation.
A) increases the size of the government budget deficit.
B) decreases private sector spending that is sensitive to interest rates.
C) forces the central bank to sell government bonds.
D) leads to an immediate increase in the unemployment rate.
Correct Answer: B
The text defines crowding out as the 'adverse effect' of government borrowing that 'leads to decreased levels of interest-sensitive private sector spending.' This reduction in private investment is the negative consequence.
A) higher real interest rate and a decrease in private investment.
B) higher real interest rate and an increase in private investment.
C) lower real interest rate and an increase in private investment.
D) lower real interest rate and a decrease in private investment.
Correct Answer: A
Financing the project by issuing bonds is a form of government borrowing. According to the text, this increases the demand for loanable funds, which raises the equilibrium real interest rate. This higher interest rate then causes a decrease, or 'crowding out,' of private investment.