Economics Crowding Out Questions
Crowding out refers to the phenomenon where increased government spending or borrowing leads to a decrease in private investment. This occurs because when the government borrows more money from the financial market to finance its spending, it increases the demand for loanable funds, which in turn drives up interest rates. Higher interest rates make it more expensive for businesses and individuals to borrow money for investment purposes, reducing their incentive to invest. As a result, crowding out reduces private investment levels in the economy.