Economics Crowding Out Questions
The effects of crowding out on interest rates in developed economies are generally an increase in interest rates. This occurs because when the government increases its borrowing to finance its spending, it competes with private borrowers for funds in the financial market. This increased demand for funds leads to a decrease in the supply of loanable funds available to the private sector, causing interest rates to rise. As a result, businesses and individuals face higher borrowing costs, which can discourage investment and consumption, potentially slowing down economic growth.