Explanation

The Crowding Out Effect occurs when increased government borrowing pushes up interest rates and reduces private investment.

Option A — Incorrect: When government spending encourages rather than displaces private investment, it is called Crowding In.

Option B — Correct: Deficit-financed government spending increases the demand for loanable funds. This can raise interest rates, making borrowing costlier for businesses and reducing private investment. This displacement is the Crowding Out Effect.

Option C — Incorrect: Higher taxes generally reduce disposable income and business earnings, which tends to discourage private investment rather than increase it.

Option D — Incorrect: Government spending directly increases aggregate demand. Crowding out only means that some of this increase may be offset by lower private investment; it does not eliminate the effect of government spending.

Therefore, Option B is the correct answer.