Question

Holding all else constant while government is borrowing to cover budget deficits, the crowding out concept suggests interest rates ________ borrowing and spending by business and households.

Answer 1

If the government has a budget deficit, crowding out might occur. Crowding out leads to all of the following; a higher real interest rate, a smaller capital stock in the future and a decreased quantity of investment.  Borrowing from the rest of the world  Government budget surpluses, private saving.