Crowding out effect
Wondering if someone could help me understand crowding out effect; I had understood it as a function of expansionary fiscal policy (increased government spending) which crowded out private investment. I got a question wrong on CFA, which said that crowding out effect is associated with increasing government borrowing.
Looking at Schweser I see the following two explanations:
“ Increased government borrowing will tend to increase interest rates, and firms may reduce their borrowing and investment spending as a result, decreasing the impact on aggregate demand of deficit spending. This is referred to as the crowding-out effect.”
“Crowding-out effect: Expansionary fiscal policy may crowd out private investment, reducing the impact on aggregate demand.”
In my mind, these lines are saying two different things: One says expansionary fiscal policy causes it (which would be increased government spending, not borrowing) and one says increased government borrowing causes it (which would be contractionary fiscal policy no?)
Any insight is much appreciated.