Crowding out occurs when debt-financed government spending increases

Question

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Crowding out refers to a situation where increased government spending and borrowing leads to higher interest rates. This happens because an increase in demand for credit pushes up the cost of borrowing. This can lead to a reduction in private sector investment, as borrowing becomes more expensive and the return on investment decreases. Therefore, higher government spending can lead to higher interest rates, crowding out private sector investment.

Crowding Out Occurs When Debt-Financed Government Spending Increases