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Distinguish between crowding out and crowding in.

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armyof32000 | Salutatorian

Posted July 24, 2013 at 6:39 PM via web

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Distinguish between crowding out and crowding in.

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literaturenerd | High School Teacher | (Level 2) Educator Emeritus

Posted July 24, 2013 at 6:57 PM (Answer #1)

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Crowding out refers to the times when "increased public sector spending replaces, or drives down, private sector spending." This requires the government to use borrowed money to pay for its spending. Essentially, the government does not have enough money to "pay bills" or finance programs, so it uses money it does not have. This increases the interest rates for "normal" people who then refuse to borrow money (for any reason). This lessens the amount of money the private sector (not controlled by the state) puts into the economy.

Crowding in, on the other hand, is defined as when governmental deficits' spur investment. In this, government spending actually increases a demand for goods. When a demand for goods is high, private sector spending increases.

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