Question

when the government goes into deficit spending to stimulate the economy, it has to borrow more money. This borrowing may have a negative impact by

Answer 1

Answer:

This borrowing may have a negative impact by crowding out private investment.

Explanation:

When the government goest into deficit spending to stimulate the economy in times when the economy is slowing down, what happens is that the government now demands more loanable funds: it demands a higher proportion of the savings in the economy in the form of government bonds.

This higher government demand for loanable funds crowds out private investment for two reasons:

• It raises the interest rate, making private investment more expensive.
• It reduces the amount of loanable funds available for the private sector (because it takes over a larger share of them).