The crowding-out effect indicates that an increase in a fiscal deficit financed by borrowing will increase interest rates and thereby crowd out some domestic investment spending.

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The crowding-out effect is a commonly accepted theory in economics, which predicts that an increase in government spending will cause interest rates to rise, causing a reduction in private investment. This is because as the government issues more debt to finance its spending, demand for credit increases, bidding up interest rates. As a result, private borrowers will be discouraged from taking on more debt, reducing the amount of investment that occurs in the economy.

The Crowding-Out Effect Indicates That an Increase in a Fiscal