Detailed Explanation:

Answer: Option 2 — Government borrowing raises interest rates, reducing private investment

Simple Explanation:

Option A — Wrong. This describes the opposite concept — "Crowding In Effect." It happens during a recession when govt spending boosts confidence and increases private investment too.

Option B — Correct. Crowding Out works like this:

1. Govt runs a deficit → borrows heavily from the market
2. More borrowers compete for the same pool of money (loanable funds)
3. This pushes interest rates up
4. Higher interest rates make loans expensive for private businesses
5. So private investment goes down — it gets "crowded out"

Option C — Wrong. Higher taxes mean less money in people's pockets → less spending/investment, not more.

Option D — Wrong. Govt spending does add to demand. Crowding out just means the net effect is smaller than expected (because private investment drops), not zero.

Memory Trick: Govt borrows too much → interest rates rise → private players get "pushed out" (crowded out) of the loan market, like a small car getting squeezed out by a big truck in traffic.