when the government goes into deficit spending to stimulate the economy, it has to borrow more money. This borrowing may have a negative impact by

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Harold Morales

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30 December, 07:44

when the government goes into deficit spending to stimulate the economy, it has to borrow more money. This borrowing may have a negative impact by

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Savanah Conrad · Answer 1

This borrowing may have a negative impact by crowding out private investment.

Explanation:

When the government goest into deficit spending to stimulate the economy in times when the economy is slowing down, what happens is that the government now demands more loanable funds: it demands a higher proportion of the savings in the economy in the form of government bonds.

This higher government demand for loanable funds crowds out private investment for two reasons:

It raises the interest rate, making private investment more expensive. It reduces the amount of loanable funds available for the private sector (because it takes over a larger share of them).