3. When the interest rate rises, the quantity of funds demanded for investment purposes falls.
4. Definition of Crowding Out: a decrease in investment that results from government borrowing.
5. When the government reduces national saving by running a budget deficit, the interest rate rises and investment falls.
6. Government budget surpluses work in the opposite way. The supply of loanable funds increases, the equilibrium interest rate falls, and investment rises.
7. Case Study: The Debate Over the Budget Surplus
a. In the late 1990s, the U.S. government found itself with a budget surplus.
b. This created a debate on what to do with this surplus.
c. Some policymakers wanted to leave the surplus alone, while others felt that the surplus should be used to finance additional government spending or tax cuts.