Fiscal Policy – the Crowding-out Effect

Previous lessons on fiscal policy have explored the multiplier effects resulting from increases in government spending and decreases in taxes. This video will examine the possibility that expansionary fiscal policy, when financed by a budget deficit, will actually result in less private sector spending, i.e. “crowding-out” of the private sector. When governments borrow to pay for a stimulus, this drives up borrowing costs for households and firms, reducing the amount of consumption and investment. The crowding-out effect reduces the effectiveness of expansionary policies aimed at increasing the total demand for a nation’s output.

Once you’ve watched this video, learn more about the crowding-out effect by reading one of the following blog posts and responding to the discussion questions included:

To order practice activities on this and other lessons from the Econ Classroom, click here.

For student revision guides and teacher PowerPoints, click here.

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