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Crowding-Out
[By Staff Reporters]
” A situation when increased interest rates lead to a reduction in private investment spending such that it dampens the initial increase of total investment spending is called crowding out effect “
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The Crowding Out effect is a Monetarist criticism of expansionary fiscal policy. As seen in the multiplier effect, government spending will shift Aggregate Demand (AD) further than expected when an expansionary fiscal policy is implemented.
Assessment
However, Monetarists believe that because of this expansionary fiscal policy, the government will need to borrow money by selling government bonds. This leads to a rise in interest rates. The increased borrowing ‘crowds out’ private investing.
Conclusion
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Filed under: Health Economics | Tagged: "Crowding Out" Effect, fiscal policy, Monetarist | Leave a comment »
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