Suppose the federal government has to borrow money because it has budget deficits.What is the mechanism through which this borrowing might crowd out private borrowing and capital accumulation?

Question

Quizplus · Accepted Answer

When the federal government has to borrow money, it increases the demand for loanable funds, which can drive up interest rates. As interest rates rise, private borrowers may be discouraged from borrowing, as it becomes more expensive to finance investments or purchases that require credit. This can also affect capital accumulation, as businesses may be less willing to invest in new equipment or expand production if the cost of financing those investments is higher.

Suppose the Federal Government Has to Borrow Money Because It