Answer to Question #29642 in Macroeconomics for dalmie
what goals and ppolicies are being discussed to address the issue of the crowding out effect?
In economics, crowding out is argued to occur by some economists when increased government borrowing, a kind of expansionary fiscal policy, reduces investment spending. The increased borrowing 'crowds out' private investing. Originally, crowding out was related to an increase in interest rates from the borrowing, but that was broadened to multiple channels that might leave total output little changed or smaller.
One channel of crowding out is a reduction in private investment that occurs because of an increase in government borrowing. If an increase in government spending and/or a decrease in tax revenues leads to a deficit that is financed by increased borrowing, then the borrowing can increase interest rates, leading to a reduction in private investment. There is some controversy in modern macroeconomics on the subject, as different schools of economic thought differ on how households and financial markets would react to more government borrowing under various circumstances. Usually when economists use the term "crowding out" they are referring to the government spending using up financial and other resources that would otherwise be used by private enterprise. However, some commentators and other economists use "crowding out" to refer to government providing a service or good that would otherwise be a business opportunity for private industry.
The macroeconomic theory behind crowding out provides some useful intuition for those trying to gain a tight grasp of the concept. What happens is that an increase in the demand for loanable funds by the government (e.g. due to a deficit) shifts the loanable funds demand curve rightwards and upwards, increasing the real interest rate. A higher real interest rate increases the opportunity cost of borrowing money, decreasing the amount of interest-sensitive expenditures such as investment and consumption. Thus, the government has "crowded out" investment.