The crowding out effect occurs when increased government spending leads to a reduction in private sector investment, typically due to higher interest rates that result from government borrowing. This phenomenon is often discussed in the context of fiscal policy and its potential to limit economic growth by displacing private investment activities.

Crowding Out Effect

crowding out effect

Government spending refers to the total expenditure by a government on goods, services, and public projects to fulfill its objectives and responsibilities. It plays a crucial role in influencing a country's economic performance, affecting everything from infrastructure development to social welfare and economic stability.

government spending

reduction in private sector investment

higher interest rates

government borrowing

Fiscal policy refers to the use of government spending and taxation to influence the economy, primarily aiming to manage economic fluctuations and promote growth. It is a crucial tool for governments to stabilize the economy, reduce unemployment, and control inflation by adjusting its levels of spending and tax rates.

fiscal policy

Economic growth refers to the increase in the production of goods and services in an economy over a period of time, typically measured as the percentage increase in real gross domestic product (GDP). It is a critical indicator of economic health, impacting employment, income levels, and overall quality of life, while also posing challenges such as resource depletion and environmental degradation.

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