5.4 Crowding Out

• Crowding out leads to higher private investment due to increased interest rates.

  False
• Order the mechanisms of crowding out:

  1️⃣ Increased Demand for Loanable Funds

  2️⃣ Higher Interest Rates Discourage Private Investment

  3️⃣ Reduced Private Sector Expansion
• Crowding out is more severe during economic recessions due to high borrowing demand.

  False
• What is the primary negative consequence of crowding out on private investment?

  Slows economic growth
• Crowding out occurs when government spending increases interest rates, making it more expensive for private businesses to borrow money and invest
• One mechanism of crowding out is the increased demand for loanable funds, which drives up interest rates.
• What is one factor that can affect the severity of crowding out?

  Government debt levels
• What is one potential long-term benefit of government spending despite crowding out?

  Infrastructure improvements
• Higher interest rates resulting from crowding out encourage private businesses to borrow money.

  False
• Crowding out reduces private investment because government borrowing increases interest
• Reducing government borrowing is a policy to mitigate the crowding-out effect.

  True
• How do higher government debt levels affect the crowding-out effect?

  Increase its severity
• Match each key term with its explanation:

  Crowding Out ↔️ Decrease in private investment due to government borrowing

  Government Spending ↔️ Money spent by the government

  Private Investment ↔️ Money invested by businesses

  Borrowing ↔️ Funds government obtains through loans

  Interest Rates ↔️ Cost of borrowing money
• Encouraging higher domestic savings can expand the pool of loanable funds and ease upward pressure on interest
• What does crowding out refer to in economics?

  Reduced private investment
• What is an example of crowding out when the government borrows heavily for infrastructure projects?

  Factory expansion delayed
• Match the mechanism of crowding out with its effect:

  Increased Demand for Loanable Funds ↔️ Drives up interest rates

  Higher Interest Rates Discourage Private Investment ↔️ Makes borrowing expensive

  Reduced Private Sector Expansion ↔️ Businesses postpone plans
• Crowding out can reduce private investment, which slows economic growth.
• Crowding out occurs when government borrowing increases the demand for loanable funds, which in turn raises interest
• Arrange the mechanisms of crowding out in the correct order:

  1️⃣ Increased demand for loanable funds

  2️⃣ Higher interest rates discourage private investment

  3️⃣ Reduced private sector expansion
• How does the state of the economy during a recession affect crowding out?

  Makes it less severe