The crowding-out effect works through interest rates and it tends to:

Question

Quizplus · Accepted Answer

The crowding-out effect occurs when increased government borrowing raises interest rates, which then reduces private sector investment and consumption. This means that an increase in government spending will be less effective because private investments will be reduced due to higher interest rates. Therefore, the crowding-out effect decreases the effectiveness of an increase in government spending.

The Crowding-Out Effect Works Through Interest Rates and It Tends