1. AP Economics
Crowding Out

2. Effect of Expansionary Fiscal Policy on Loanable Funds & Investment
SLF r% r% r1 r
DLF 1 ID
DLF IG q q1
QLF I1 I
G↑ and/or T↓ .: Government deficit spends .: DLF  .: r%↑ .: IG↓
(Crowding-Out Effect)

3. G↑+ IG↓+ C ↑ ↓+Xn = GDP ↑ (Crowding-Out Effect)
An Expansionary Fiscal Policy as previously diagrammed will lead to higher interest rates.
At higher interest rates, businesses will take out fewer loans and there will be a decrease in INVESTMENT (I)
At the same time there will be a decrease in CONSUMER SPENDING (C) as they will take out fewer loans as well.
This CROWDING OUT EFFECT will reduce the gain made by the expansionary fiscal policy.
G↑+ IG↓+ C ↑ ↓+Xn = GDP ↑ (Crowding-Out Effect)