What is Crowding Out?
- Crowding out is the decrease in private investment that occurs due to a reduction in government savings or an increase in government borrowing.
How Do I Remember It?
- Think of crowding out as the government’s presence pushing aside private investors. It’s like a crowded room where the government takes up all the space, leaving less room for private investors to maneuver.
Real World Example
- When a government increases its borrowing to finance large infrastructure projects, it absorbs a significant portion of available funds in the financial market.
- As a result, interest rates rise, making it more expensive for businesses to borrow money for investment in areas like expansion, research, or innovation. This reduction in private investment due to government borrowing illustrates the concept of crowding out.
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