Crowding Out

Definition

Crowding out refers to the phenomenon where increased government spending leads to a decrease in private sector spending. This occurs when the government borrows funds from the market, causing interest rates to rise and making it more expensive for businesses and individuals to borrow money.

Related terms

Government Borrowing: This term refers to when the government obtains funds by issuing bonds or borrowing from citizens or foreign entities.

Interest Rates: Interest rates represent the cost of borrowing money. They determine how much individuals or businesses have to pay back on loans.

Private Sector: The private sector encompasses all non-governmental organizations, such as businesses and households, that participate in economic activities outside of government control.