5.5 Crowding Out
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Assuming the government increases deficit spending what will happen to the demand for loanable funds, the real interest rate, and private investments?
- Demand increases - real interest rate increases - private investment decreases
What is crowding out?
when government budget deficits have a negative effect by driving up interest rates and reducing investment due to expansionary fiscal policy.
What is the long-run impact of higher real interest rates?
less economic growth bc investment falls, less capital stock
What does crowding out lead to?
it leads to less private investment spending
