Crowding out occurs when A. increases in taxes cause interest rates to​ rise, reducing investment and consumption. B. increases in investment and consumption cause interest rates to​ rise, reducing the ability of the government to borrow funds. C. decreases in government spending cause interest rates to​ rise, reducing investment and consumption. D. increases in government spending cause interest rates to​ fall, reducing investment and consumption. E. increases in government spending cause interest rates to​ rise, reducing investment and consumption.

E. Increases in government spending cause interest rates to rise, reducing investment and consumption. This describes the phenomenon of crowding out in economics. When the government increases its spending, and if it finances that spending by borrowing more, it can lead to higher demand for loanable funds. This can push interest rates up, making it more expensive for private businesses and individuals to borrow. As a result, private investment and consumption can be reduced because of these higher interest rates.

Extra: In the discussion of crowding out, it's essential to understand a few key concepts: 1. **Loanable Funds Market**: This is the hypothetical market where savers supply funds for loans to borrowers. The interest rate is the "price" in this market. 2. **Government Spending**: When the government spends money on goods, services, or social programs, the funding for this spending must come from somewhere. Often, it comes from either raising taxes or borrowing money.

3. **Government Borrowing**: When the government borrows money, it typically issues government bonds that investors buy. The more the government borrows, the more bonds it has to sell. Increased supply of bonds can lead to higher interest rates as the government competes with private borrowers for funds.

4. **Interest Rates**: These are the rates at which money can be borrowed. They influence how much it costs to get a loan for various purposes, such as buying a house, investing in new business projects, or financing government deficits.

5. **Investment and Consumption**: Investment refers to businesses spending on capital goods, and consumption is expenditure by households. Both of these can be sensitive to changes in interest rates. If interest rates are high, businesses may scale back on investments because of the higher cost of borrowing, and households may reduce consumption financed by credit.

The crowding-out effect essentially means that larger government deficits include higher demand for funds, which could lead to higher interest rates and, therefore, lower investment and consumption by the private sector. However, the complete effect depends on many factors, including the state of the economy, monetary policy responses, and how sensitive private sector spending is to changes in interest rates.