Economics Crowding Out Questions
Crowding out refers to the phenomenon where increased government spending or borrowing leads to a decrease in private sector investment. This occurs because when the government increases its borrowing, it competes with businesses for available funds in the financial market, causing interest rates to rise. As interest rates increase, the cost of borrowing for businesses also rises, making it more expensive for them to invest in new projects or expand their operations. Consequently, businesses may reduce their investment activities, leading to a decrease in overall business investment. Therefore, there is a negative relationship between crowding out and business investment, as increased government borrowing crowds out private sector investment.