Private investment will be most likely to be increased as a result of a rise in

The correct answer is the Expected yield on new capital.

Key Points

• A larger budget deficit will increase the demand for financial capital.
  • If private savings and the trade balance remain the same, then less financial capital will be available for private investment in physical capital.
  • Private investment will be most likely to be increased as a result of a rise in the expected yield on new capital.
• When government borrowing soaks up available financial capital and leaves less for private investment in physical capital, the result is known as crowding out.
  • ​A situation when increased interest rates lead to a reduction in private investment spending such that it dampens the initial increase of total investment spending is called the crowding-out effect.