Crowding out leads to decreased consumption, and generally occurs because of increased government spending. With a fiscal policy in play, the government puts more money into the money flow/economy, which people then save instead of spending it. Since people are saving money and not spending, consumption will decrease.


Economist would most likely agree on that there is some crowding out when the government is borrowing money to fund additional spending, but there is a great deal of contention as to the extent to which investment funding is affected.

From a Traditional Keynesians' point of view, they largely disregard any possible crowding out effects, operating as they were under the assumption that investment levels were largely unaffected by inerest rate.

From a Modern day Keynesians' point of veiw, they accept a degree of crowding out, but still regard investment demand as relatively inelastic.

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