5.5 Crowding Out

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