The "crowding out" effect decreases planned investment and decreases the value of the multiplier.

Question

Quizplus · Accepted Answer

The "crowding out" effect occurs when government borrowing increases interest rates, which reduces private sector borrowing and investment. This decrease in planned investment decreases the value of the multiplier, as there is less additional spending generated for each initial injection of government spending.

The "Crowding Out" Effect Decreases Planned Investment and Decreases the Value