Economics Crowding Out Questions
Crowding out refers to the phenomenon where increased government spending, as a result of expansionary fiscal policy, leads to a decrease in private sector spending. When the government increases its spending, it often needs to borrow money by issuing bonds. This increases the demand for loanable funds, which in turn leads to an increase in interest rates. Higher interest rates make borrowing more expensive for businesses and individuals, reducing their willingness to invest and spend. As a result, private sector spending is crowded out by the increased government spending. This can limit the effectiveness of expansionary fiscal policy in stimulating economic growth.