Crowding out negatively affects the economy by:

a) Decreasing government borrowing,

b) Decreasing consumption,

c) Increasing private borrowing,

d) Reducing investment spending on physical capital,

e) Decreasing government deficits.

If the supply of money is low, the government can help raise these levels by buying treasury bills or bonds from the public, increasing the amount available for consumption and investment purposes. If the money supply high, it sells bonds and bills to reduce the amount in circulation. If there is a deficit in the yearly financial budget of a nation, the government can borrow from both internal and external sources. The issue of bonds and bills to the public is an example of internal borrowing. The government uses monetary tools such as high-interest rates to attract investors. Individuals are therefore drawn from private investments to lend to the government, which has higher returns, and this is the crowding effect of government borrowing. The government crowds out investment in the private sector. Crowding out negatively affects the economy by (d) reducing investment spending on physical capital that would have increased production leading to benefits such as high economic growth and low unemployment levels.