Unit 3.6 · Demand Management (Fiscal Policy)
Crowding Out Effect (HL only)
AO4HLDiagram required
Syllabus Requirement
Government borrowing raises interest rates, reducing private investment—potentially offsetting fiscal stimulus.
Assessment Objectives
AO4Use of Appropriate Skills
HLThis topic is assessed at Higher Level only.
Summary
The crowding out effect refers to the phenomenon where increased government spending leads to higher interest rates, which in turn reduces private investment. This concept is important in understanding the implications of fiscal policy on the economy, particularly during periods of economic downturns when government intervention is often necessary.