Economics Crowding Out Questions
Crowding out refers to the phenomenon where increased government borrowing leads to a decrease in private sector borrowing. This can affect the cost of borrowing for households in two ways. Firstly, when the government borrows more, it increases the demand for loanable funds, which in turn leads to an increase in interest rates. Higher interest rates make borrowing more expensive for households, as they have to pay more in interest payments. Secondly, crowding out can also reduce the availability of credit for households, as financial institutions may prefer to lend to the government rather than individuals or businesses. This limited availability of credit can further increase the cost of borrowing for households, as they may have to compete for a smaller pool of funds, leading to higher interest rates.