The crowding-out effect is likely to be greater when the

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The crowding-out effect occurs when government borrowing causes interest rates to rise, which then reduces private investment. This effect is likely to be greater when the economy is at full employment because there is less available productive capacity, so higher demand for investment could lead to greater competition and thus higher interest rates. In a recession or when unemployment is rising, there is more unused capacity, so demand for investment is likely to be lower, which reduces the crowding-out effect. A government incurring surpluses rather than deficits would have less need to borrow, so there would be less of a crowding-out effect overall.

The Crowding-Out Effect Is Likely to Be Greater When the