Crowding-out occurs when government borrowing reduces that amount of saving available for private investment or private spending. Higher government deficits crowd out private investment. The mechanism by which this works in interest rates. When the government borrows money, it increases the demand for loanable funds, bidding up their price. Real Balance Effect.
Higher prices reduce the value of money held by consumers.
With less wealth, consumers will lower their consumption. Interest Rate Effect. With higher prices, people will want to hold more money, so less money will go to the loanable funds market. This will raise interest rates, leading to lower consumption and investment. International Substitution Effect With higher domestic prices, consumers are encouraged to buy imports instead of domestic goods, and the demand for domestic goods goes down.