Crowding out (挤出 jǐ chū) occurs when government spending fails to boost the overall aggregate demand because higher government spending leads to a fall in private sector spending and investment simultaneously. As the government finances its spending through borrowing more, interest rates go up and there are fewer financial resources for private borrowers, which exerts a negative effect on aggregate demand. Another way to achieve higher government spending is an increase in taxation, which will reduce the income of individuals and firms, thus discouraging spending and investment.
Part 1: Breakdown of Words
- “挤” (jǐ) as in “crowded” (拥挤 yōng jǐ), “squeeze” (挤压 jǐ yā), or “push aside/push out” (排挤 pái jǐ).
- “出” (chū) as in “get out” (出去 chū qù), “exit” (出口 chū kǒu), or “appear” (出现 chū xiàn).
Part 2: Examples
- Crowding out effect (挤出效应 jǐ chū xiào yìng).
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