Economics Crowding Out Questions
Crowding out affects the supply of loanable funds by reducing it. When the government increases its borrowing to finance its spending, it competes with private borrowers for the available funds in the financial market. This increased demand for funds leads to higher interest rates, which in turn discourages private investment and borrowing. As a result, the supply of loanable funds decreases as private borrowers are crowded out by the government's borrowing.