Economics Crowding Out Questions
Crowding out refers to the phenomenon where increased government spending, financed through borrowing, leads to a decrease in private sector investment. In the context of monetary policy, when the government increases its spending, it typically borrows money from the financial markets, which increases the demand for loanable funds. This increased demand for funds leads to higher interest rates, making it more expensive for businesses and individuals to borrow money for investment purposes. As a result, private sector investment decreases, as it is crowded out by the government's borrowing. This can have a negative impact on economic growth and productivity in the long run.