Economics Crowding Out Questions
Crowding out refers to the phenomenon where increased government spending on public investment leads to a decrease in private investment. This occurs when the government borrows funds from the financial market to finance its projects, which increases the demand for loanable funds and subsequently raises interest rates. As interest rates rise, it becomes more expensive for businesses and individuals to borrow money for their own investments, leading to a decrease in private investment. Therefore, the increase in public investment crowds out private investment, as the government's borrowing reduces the availability of funds for private sector investment.