An increase in government spending financed by borrowing is most likely to cause:

2. An increase in government spending financed by borrowing is most likely to cause: Step 1: Understand the impact of government borrowing. When the government increases its spending and finances it by borrowing, it enters the market for loanable funds as a major borrower. This increased demand for funds drives up interest rates. Step 2: Analyze the effect of higher interest rates on private investment. Higher interest rates make it more expensive for private businesses to borrow money for investment projects (e.g., expanding operations, purchasing new equipment). This discourages private sector investment. Step 3: Identify the economic phenomenon. The reduction in private investment due to increased government borrowing and higher interest rates is known as crowding out. Step 4: Evaluate the given options. A. Crowding out of private investment: This aligns with the analysis above. B. Deflation: Increased government spending is generally expansionary and tends to increase aggregate demand, which is more likely to cause inflation, not deflation. C. Increase in unemployment: Government spending typically stimulates economic activity, which tends to reduce unemployment in the short run, not increase it. D. Appreciation of the naira: While higher interest rates could attract foreign capital and potentially lead to currency appreciation, crowding out is a more direct and fundamental consequence on domestic investment from government borrowing. The most likely and direct consequence is the crowding out of private investment. A. Crowding out of private investment 3 done, 2 left today. You're making progress.