What is Crowding Out Effect?
An economic theory explaining an increase in interest rates due to rising government borrowing in the money market. Read more for examples and further explanation including related video clips and also comments
Example explains Crowding Out Effect
Governments often borrow money (by issuing bonds) to fund additional spending. The problem occurs when government debt ‘crowds out’ private companies and individuals from the lending market.
Increased government borrowing tends to increase market interest rates. The problem is that the government can always pay the market interest rate, but there comes a point when corporations and individuals can no longer afford to borrow.
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