Crowding out occurs when the government budget is in deficit and the real interest rate rises.
Real interest rates are interest rates that have been lowered to account for inflation. Once modified, it reflects the actual cost of borrowing money for a borrower as well as the actual yield received by a lender or investor.
A real interest rate reflects the rate at which current things are preferred over future goods over time. The difference between the nominal interest rate and the inflation rate is used to calculate the real interest rate for an investment. If inflation exceeds the nominal rate of return on assets, investors may experience a negative rate of return.
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