ATHE CROWDING OUT MODEL IMPLIES BUDGET DEFICITS WILL INCREASE DEMA...

The crowding out model implies budget deficits will increase demand, not decrease demand, for loanable

funds and put upward pressure on the real rate of interest. Emprical studies have shown that the

relationship between budget deficits and interest rates is weak at best. The main argument of the new

classical economists is that the government ultimately needs to repay its taxes.