It refers to a situation in which the increase in interest rates causes a reduction in private investment spending in such a way that it reduces the initial increase in total investment spending and is called the crowding-out effect.
The crowding-out effect is an economic theory that argues that increased public sector spending reduces or even eliminates private sector spending. Crowding refers to when the government must finance its spending with taxes and/or deficit spending, leaving businesses with less money and effectively crowding them out.One explanation for why crowding out occurs is government financing of deficit-spending projects through the use of borrowed money.The crowding-out effect is the offset in aggregate demand that results when expansionary fiscal policy,such as an increase in government spending or a decrease in taxes,raises the interest rate and thereby reduces investment spending.
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