Crowding Out
Crowding out is an economic term that describes the situation in which increased government spending reduces private investment. This occurs when the government borrows money to finance its spending, which increases the demand for loanable funds and drives up interest rates. As a result, private investors are unable to borrow money at a rate that is low enough to make their investments profitable, so they reduce their investment. This reduces the amount of money available for private investment, which can lead to slower economic growth.
History of Crowding Out
The concept of crowding out was first introduced by British economist John Maynard Keynes in his 1936 book, The General Theory of Employment, Interest, and Money. Keynes argued that government spending could have a negative effect on private investment, and that this could lead to slower economic growth. Since then, the concept of crowding out has been widely accepted by economists and is used to explain why government spending can have a negative effect on economic growth.
Comparison Table
| Government Spending | Private Investment |
|---|---|
| Increases | Decreases |
Summary
Crowding out is an economic term that describes the situation in which increased government spending reduces private investment. This occurs when the government borrows money to finance its spending, which increases the demand for loanable funds and drives up interest rates. As a result, private investors are unable to borrow money at a rate that is low enough to make their investments profitable, so they reduce their investment. This reduces the amount of money available for private investment, which can lead to slower economic growth. For more information about crowding out, you can visit websites such as Investopedia, The Balance, and the Federal Reserve Bank of St. Louis.
See Also
- Keynesian Economics
- Monetary Policy
- Fiscal Policy
- Interest Rates
- Inflation
- Deficit Spending
- Debt Financing
- Government Spending
- Private Investment
- Economic Growth
