In this lesson we'll examine another interpretation of the crowding-out effect, which says the supply of funds available in the private sector will decrease when a government deficit spends, due to the fact that government must offer higher interest rates on its debt, making saving in the private banking system less attractive to households. The supply of loanable funds will therefore decrease, driving up private interest rates and reducing the quantity of investment and consumption among households. The end result is the same: government spending is "crowded-out" by a decline in private spending, rendering the fiscal policy less effective than desired.
