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What is Crowding In?

A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 16 Jan 2023

Crowding in is the opposite of crowding out. It is a Keynesian economic theory that suggests that an increase in government spending can lead to an increase in private investment.

The theory argues that higher government spending can stimulate economic activity and create a more favourable macro-economic environment for private capital investment.

The idea behind crowding in is that government spending can boost aggregate demand (C+I+G+X-M) which can lead to increased real economic growth, higher employment and higher real incomes.

This, in turn, can increase consumer and business confidence (an improvement in animal spirits) leading to increased private investment in new projects and businesses.

The crowding-in effect can also happen through monetary policy. For example, when the central bank lowers interest rates to stimulate economic activity, it can make borrowing cheaper for private investors and encourage them to invest in new projects and businesses.

As with crowding out, the crowding-in effect is not a universally accepted theory, and it depends on the specific economic conditions of a country.

For instance, if the government spending is targeted at infrastructure projects that increase productivity and the private sector is healthy, crowding-in is more likely to happen.

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