Economics Crowding Out Questions
Crowding out refers to the phenomenon where increased government borrowing leads to a decrease in private sector investment. In the context of expansionary monetary policy, crowding out can impact its effectiveness by reducing the intended impact on stimulating economic growth. When the government increases its borrowing to finance expansionary policies, it competes with the private sector for available funds, leading to higher interest rates. Higher interest rates discourage private sector investment and borrowing, as it becomes more expensive for businesses and individuals to access credit. This reduction in private sector investment can offset the intended expansionary effects of monetary policy, limiting its effectiveness in stimulating economic activity.