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The crowding out effect is an economic theory arguing that rising public sector spending drives down or even eliminates private sector spending. Crowding out of investment is defined as a situation when increased interest rates lead to a reduction in private investment spending such that it dampens the initial increase of total investment spending is called crowding out effect. The impact of crowding out can be increased government borrowing and spending causing a reduction in private spending. Because government borrowing increases the cost of private loans and uses up capital that may have been deployed elsewhere, businesses and individuals don't borrow or spend as much money.
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