Concepts
- Deficit Spending by the Government
- Increases Demand for Loans
- Increases in the Interest Rate
- Decreases How Much People and Businesses Borrow/Spend
Overview
The crowding out effect is one of the biggest criticisms of Keynesian economics because of its negative impact on aggregate demand. Here’s the basic rundown: when the government engages in deficit spending it drives up the demand for borrowing money. As a result, the price of borrowing (aka the interest rate) goes up. This negatively impacts people and businesses who plan to borrow money (especially businesses, because they borrow A LOT of money). People and businesses can’t afford to borrow as much, which means they spend less. In closing, the initial increase in deficit spending “crowds out” some consumption and investment spending because of the resulting increase in interest rates.
Materials
Lecture
Video Coming at Later Date
Quiz
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