Economics Crowding Out Questions
Crowding out affects the allocation of resources by reducing the availability of funds for private investment and consumption. When the government increases its borrowing to finance its spending, it competes with the private sector for funds, leading to higher interest rates. As a result, businesses and individuals may find it more expensive to borrow and invest, leading to a decrease in private investment and consumption. This reduces the overall efficiency of resource allocation as resources are diverted towards government projects rather than being allocated based on market demand and productivity.