Explanation
- A
A situation where private investment increases due to increased Government spending
This option describes the opposite phenomenon, often called crowding-in, where higher government expenditure stimulates economic activity and encourages private investment rather than reducing it.
- B
A situation where Government borrowing leads to higher interest rates, which reduces private investment
A situation where Government borrowing leads to higher interest rates, which reduces private investment. When the government borrows heavily to finance its fiscal deficit, the increased demand for loanable funds drives up interest rates, making it costlier for private firms to borrow and invest.
- C
A situation where an increase in taxes leads to increased private sector investment
This option incorrectly suggests a positive link between higher taxation and private investment, whereas increased taxes typically reduce disposable incomes and corporate profits, dampening private investment.
- D
A situation where Government spending has no impact on aggregate demand
This option describes a situation contrary to standard Keynesian and classical economic models, which recognize that government spending directly affects aggregate demand either through multiplier effects or through crowding out.
Summary. Official key is (b). The crowding out effect occurs when increased government borrowing pushes up interest rates, thereby suppressing private sector investment.
Same topic · past papers
UPSC has asked this before
These previous-year questions sit on the same topic. Open one to practise the earlier ask.
-
2025 · Q28 · General Studies · 2 marks
Consider the following statements: Statement I: In the context of effect of water on rocks, chalk is known as a very permeable rock whereas clay is known as quite an impermeable or least permeable rock. Statement II: Chalk is porous and hence can absorb water. Statement III: Clay is not at all porous. Which one of the following is correct in respect of the above statements? -
2025 · Q51 · General Studies · 2 marks
Which reference to the Indian polity, consider the following statements : I. An Ordinance can amend any Central Act. II. An Ordinance can abridge a Fundamental Right. III. An Ordinance can come into effect from a back date. Which of the statements given above are correct? -
2024 · Q16 · General Studies · 2 marks
One of the following regions has the world's largest tropical peatland, which holds about three years worth of global carbon emissions from fossil fuels; and the possible destruction of which can exert detrimental effect on the global climate. Which one of the following denot that region ? -
2024 · Q81 · General Studies · 2 marks
Consider the following statements regarding 'Nari Shakti Vandan Adhiniyam' : 1. Provisions will come into effect from the 18th Lok Sabha. 2. This will be in force for 15 years after becoming an Act. 3. There are provisions for the reservation of seats for Scheduled Castes Women within the quota reserved for the Scheduled Castes. Which of the statements given above are correct ?