Economics Crowding Out Questions
Crowding out refers to the phenomenon where increased government borrowing and spending leads to a decrease in private sector investment. In the context of public debt, when the government needs to finance its budget deficit by issuing bonds, it competes with private borrowers for funds in the financial market. This increased demand for funds drives up interest rates, making it more expensive for businesses and individuals to borrow money for investment purposes. As a result, private sector investment decreases, leading to a reduction in economic growth and productivity. Therefore, crowding out occurs when government borrowing "crowds out" private investment by absorbing available funds in the financial market.