What is crowding out, and how do you show it on the loanable funds graph?

Crowding out is what happens when the government borrows more and that borrowing competes with private borrowers for a limited pool of saving. The extra demand for funds pushes up the real interest rate, and the higher rate makes some private investment and other interest sensitive spending too costly to go ahead. The government ends up taking a larger share of total borrowing, and part of what would have been private borrowing does not happen. Crowding out is a tendency, not a fixed rule, and how much of it occurs depends on spare capacity in the economy and how much private saving and foreign capital respond.

Key terms

A few terms do most of the work in this topic, and the glossary has short entries for each.

• Loanable funds market. The market for saving made available to borrowers. The vertical axis is the real interest rate, and the horizontal axis is a flow of funds per period, not a stock of money.
• National saving. Private saving plus public saving. Public saving is tax revenue minus government spending, so it is positive when the budget runs a surplus and negative when it runs a deficit.
• Fiscal deficit. Government spending that exceeds tax revenue in a period, financed by issuing debt. A deficit means negative public saving.
• Crowding out. The reduction in private borrowing and private investment that follows from a higher real interest rate caused by more government borrowing.

This page draws the loanable funds market on its own. The nominal rate and the money market are a separate graph, covered on the money market and loanable funds explainer, which also introduces crowding out alongside open market operations. This page goes further into the two accepted drawings and adds a dated real world example.

How to draw crowding out on the loanable funds graph

1. Label the vertical axis the real interest rate and the horizontal axis the quantity of loanable funds, a flow, not a stock of money.
2. Draw supply of loanable funds sloping up, because a higher real rate draws out more saving.
3. Draw demand for loanable funds sloping down, because a higher real rate discourages borrowing for investment and other interest sensitive spending.
4. Mark the starting equilibrium E0 where they cross.
5. Show a bigger government deficit as demand shifting right, from D0 to D1, because the government is now one more borrower at every real rate.
6. Mark the new equilibrium E1. The real rate rises. In this drawing the quantity of funds also rises, because the higher rate pulls out extra saving, but part of that rise is the government's own borrowing, not new private borrowing.

Two ways to draw the same deficit

The College Board course framework accepts two drawings of a deficit, and both are on the loanable funds market, not the money market.

Deficit as a rightward shift of demand

Treat the government as an extra borrower. Demand for loanable funds shifts right, as in the sketch above. The real rate rises. The equilibrium quantity of funds can rise too, since the higher rate draws out more total saving. Private borrowing is the equilibrium quantity minus the government's own new borrowing, and that private share falls even when the total rises. If a free response answer says the quantity on the axis fell, it is using the other drawing below, so stay consistent inside one drawing.

Deficit as a leftward shift of supply

National saving is private saving plus public saving. A deficit means negative public saving, so it can also be drawn as supply of loanable funds shifting left. The real rate still rises. In this drawing the equilibrium quantity falls, and since that quantity is now private investment, the smaller quantity itself is the crowding out. Shifting both demand right and supply left for the same single deficit counts it twice, which is a common AP scoring error.

How much private spending actually falls, net of the government's own purchases shifting aggregate demand the other way, is the question the fiscal multipliers explainer and the fiscal multiplier calculator pick up. A simple spending multiplier built only from the marginal propensity to consume ignores the real rate rise. Crowding out is one reason estimated multipliers in the literature are often smaller than that simple sketch suggests.

Try it: a crowding out checker

Enter a hypothetical increase in the government deficit and two offset percentages. The checker splits that deficit increase into a change in private saving, a change in net foreign capital inflows, and the remainder, which is the reduction in private domestic investment, meaning the crowding out. The two default percentages below come from the Congressional Budget Office's own long run estimates, sourced below; the dollar amount and any other percentage you type are hypothetical teaching inputs, not a forecast.

Increase in the federal deficit, $bn (hypothetical) Private saving offset, percent of each new deficit dollar Foreign capital inflow offset, percent of each new deficit dollar

This split follows the accounting the Congressional Budget Office uses in its own long run analysis, described in the dated example below. It is a teaching simplification: it assumes one deficit change in isolation, holds the two offset percentages fixed, and does not model how much spare capacity the economy has at the time. A deficit that happens when the economy has a lot of slack tends to crowd out less than this simple split implies.

A dated worked example from the CBO

The checker above uses round, hypothetical numbers. Here are the Congressional Budget Office's own published figures, each with a named release and a date, kept separate from the teaching sketch and the checker.

In a presentation on federal borrowing dated March 2025, the CBO set out its long run estimate of crowding out: for each additional dollar of federal deficit, private saving rises by about 43 cents and net foreign capital inflows rise by about 24 cents, each partly offsetting the deficit. The remainder, a reduction in private domestic investment of about 33 cents per dollar, is CBO's central estimate, within a published range of about 15 to 50 cents. The same presentation estimates that the average long run interest rate rises by about 2 basis points for each 1 percentage point increase in federal debt held by the public as a share of GDP, an effect it calls the debt sensitivity of interest rates.

In its Budget and Economic Outlook for 2026 to 2036, published February 2026, the CBO projects that the federal government will borrow an additional $26 trillion from the end of 2025 to the end of 2036 under current law, raising debt held by the public to about $56 trillion, or about 120 percent of GDP, by 2036. The report states plainly that rising federal borrowing raises interest rates throughout the economy and reduces private investment, and it names the resulting gradual reduction in private investment "a phenomenon referred to as crowding out," counting it as one reason its own projection for average real GDP growth from 2027 to 2036 is 1.8 percent a year rather than higher.

These are the CBO's own projections and long run estimates about the United States federal budget, not a prediction from this site about any future interest rate, and not investment advice. The published range, 15 to 50 cents per dollar, shows how uncertain the exact size of crowding out is even to the agency that estimates it.

Common AP exam mistakes

AP Macroeconomics Unit 4, the financial sector, introduces the loanable funds market, and Unit 5, long run consequences of stabilization policies, is where crowding out usually appears on an exam. The names follow the public course description. This page is a study aid, not an official exam item, and it is not affiliated with the College Board.

• Using the money market instead. Crowding out belongs on the loanable funds graph, with the real interest rate on the vertical axis, not the money market's nominal rate.
• Shifting both curves for one deficit. A single deficit is either a rightward shift of demand or a leftward shift of supply, not both at once. Shifting both double counts it.
• Assuming the quantity always falls. In the demand shift drawing, the equilibrium quantity of funds can rise even while the private share of borrowing falls. Only the supply shift drawing shows the quantity itself falling.
• Forgetting the direct spending effect. A deficit driven by more government purchases also shifts aggregate demand right on its own. Crowding out is a partial offset to that, not a claim that the deficit has no effect on output.
• Treating crowding out as automatic and total. The CBO's own range, 15 to 50 cents of reduced investment per dollar of deficit, shows crowding out is partial and depends on how much private saving and foreign capital respond.

Short definitions sit in the glossary. The full unit by unit list is on the AP Macro review hub, and the broader policy picture is on the monetary and fiscal policy topic page.

Sources

• College Board, AP Macroeconomics course page (Unit 4, the financial sector, and Unit 5, long run consequences of stabilization policies, as course context only)
• College Board, AP Macroeconomics Course and Exam Description, Effective Fall 2026 edition (loanable funds market and crowding out)
• Congressional Budget Office, Federal Borrowing presentation, March 2025 (crowding out offsets and the debt sensitivity of interest rates)
• Congressional Budget Office, The Budget and Economic Outlook: 2026 to 2036, February 2026 (projected federal borrowing, debt, and crowding out)
• Bureau of Economic Analysis, Personal Saving Rate
• Bureau of Economic Analysis, Government Receipts and Expenditures
• FRED, Federal Surplus or Deficit (series FYFSD), Federal Reserve Bank of St Louis, sourced from the US Treasury and OMB
• Bank of England, Monetary policy (UK rate setting context for readers comparing frameworks)

What is crowding out in economics?

Crowding out is the idea that when government borrowing rises, it competes with private borrowers for a limited pool of loanable funds. That pushes up the real interest rate, and the higher rate discourages some private investment and other interest sensitive spending. The government takes a larger slice of total borrowing, and part of what used to be private borrowing gets priced out.

How do you show crowding out on the loanable funds graph?

Two drawings are both accepted. One treats the deficit as a rightward shift of demand for loanable funds, since the government is one more borrower; the real rate rises and total funds borrowed can rise even as private borrowing falls. The other treats the deficit as a leftward shift of supply, since a deficit is negative public saving and national saving is private saving plus public saving; the real rate rises and the equilibrium quantity falls. Pick one drawing and stay consistent within it.

Does a government deficit always reduce total borrowing in the economy?

No. In the demand shift drawing, the equilibrium quantity of loanable funds can rise, because the higher real rate draws out more saving. What falls is the private share of that borrowing, not necessarily the total. In the supply shift drawing the total quantity itself falls. Either way the real rate rises and private investment is smaller than it would have been without the deficit.

Is crowding out the same thing as fiscal dominance?

No. Crowding out is about a deficit raising the real interest rate and reducing private investment, shown on the loanable funds graph. Fiscal dominance is a separate idea about a government's financing needs constraining a central bank's ability to fight inflation. See the fiscal dominance explainer for that distinction.

Does the Congressional Budget Office say crowding out always happens by a fixed amount?

No. The CBO publishes a range, not a fixed number, because private saving and foreign capital inflows partly offset a larger deficit by an uncertain amount. Its central long run estimate is that each additional dollar of federal deficit reduces private domestic investment by about 33 cents, within a published range of about 15 to 50 cents. That is a long run estimate about the United States federal budget, not a guarantee for any single year or country.