Crowding out occurs when government borrowing forces up the interest rate and discourages households and businesses from borrowing.

Question

Quizplus · Accepted Answer

Crowding out happens because increased government borrowing to finance its deficit raises the demand for credit, which can lead to higher interest rates. This, in turn, makes borrowing more expensive for households and businesses, potentially reducing their investment and spending.

Crowding Out Occurs When Government Borrowing Forces Up the Interest