Crowding out occurs when deficit spending by the government forces private investment spending to contract.

Question

Quizplus · Accepted Answer

When the government increases its spending and borrows money to finance the deficit, it increases the demand for loanable funds, which can lead to an increase in interest rates. High interest rates make borrowing more expensive for private investors, and as a result, they decrease their investment. This phenomenon is known as crowding out.

Crowding Out Occurs When Deficit Spending by the Government Forces