The crowding-out effect states that as the government borrows to pay for a deficit, and it drives up the interest rates, which crowds out private spending and investment.

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The crowding-out effect is a well-known phenomenon in macroeconomics that takes place when the government borrows more money to finance a deficit, which increases the demand for credit, resulting in higher interest rates. As interest rates rise, private investment and spending tend to decrease, as borrowing becomes more expensive, crowding out the private sector's borrowing demand. As a result, the government's borrowing displaces or "crowds out" private investment and consumption.

The Crowding-Out Effect States That as the Government Borrows to Pay