CROWDING OUT EFFECT

Economic concept in which increasing interest rates lead to lower private investment spending. It pertains to a situation where government must fund its expenditures with taxes and/or deficit spending, which dampens business’ capital and drives them out effectively. For instance, the government finances its projects with deficit spending through the usage of borrowed money. Since the government borrows huge amount of capital, its activities can increase interest hikes. Hence, entities are discouraged from borrowing money and in turn, reduces their spending and investment activities.

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