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Crowding Out Effect
AP Macroeconomics · Fiscal Policy
Loanable Funds Market

The market where borrowers demand funds and savers supply funds. The price of borrowing is the Real Interest Rate.

The Mechanism
1. Gov Deficit: Government needs money, increasing the total Demand for Loanable Funds.
2. Rate Spike: Equilibrium real interest rate rises.
3. Crowdout: Higher borrowing costs drastically reduce private business investment.
Tags
Crowding OutFiscal PolicyInterest RatesInvestment
Government Fiscal Action
Gov Deficit Borrowing (Demand Shift): 0B
Logical Chain
Increase Deficit Spending
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Real Interest Rate: 4.0%
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Private Investment: Normal