Question

What is crowding out? How do rising interest rates cause crowding out? Why is crowding out of concern for the economy?

Answer 1

Ans:-The crowding out is a situation where as a result of rising public sector spending and increasing its borrowing by large governments like that of the U.S which drives down or reduce private sector spending such as personal consumption of goods and services and investments by business.

The rising out could cause to rises in the real interest rate which in result to affect the lending capacity of Economy and leading to discouraging business. It can be caused by an expansionary fiscal policy financed by increased taxes, borrowing.

As far as concerns for the economy is considered as a result of crowding out which could lead to economic decline, reducing revenues to the government like collection of taxes and it will in turn encourage the government to borrow even more money.