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🚀Boost Your Economics Grade Now! 🔗 in Bio The crowding out effect occurs when an increase in government spending leads to a decrease in private sector spending. This happens because government spending typically requires the government to borrow money from the private sector. When the government borrows more money, it reduces the amount of money available for private borrowing, which can lead to higher interest rates. Higher interest rates reduce the amount of money that people and businesses
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