Crowding Out Effect (HL only)

This topic explains how expansionary fiscal policy can raise aggregate demand but also push up interest rates, which may reduce private investment — a process called crowding out. It also outlines key strengths of fiscal policy: the ability to target specific sectors, its power to stimulate activity during deep recessions (via government spending and the Keynesian multiplier), and the role of automatic stabilizers at HL. The material matters because fiscal choices affect short-term output, budget balances, and long-term confidence in the economy.