Which circumstance would help mitigate crowding-out?

• A. Increased private saving by households
• B. Higher government deficits
• C. Monetary tightening
• D. Decreased private investment

Answer: (A)

The main idea is that crowding-out happens when the government borrows to finance a deficit, increasing demand for loanable funds and pushing up interest rates, which in turn reduces private investment. If households save more, the supply of loanable funds increases, so there are more funds available for borrowing. This extra saving can meet the government's higher demand without causing as big a rise in interest rates, or may even keep rates lower, which lessens the pressure on private investment. In other words, higher private saving shifts the saving supply curve to the right, mitigating the crowding-out effect. Choices that raise deficits or tighten monetary policy would typically amplify crowding-out, while decreasing private investment is the outcome of crowding-out, not a mitigating factor.