What does crowding-out effect in a closed economy mean in simple terms?

So...if there is 0 crowding-out effect, does it means that the investment/savings stays the same? Actually... I don't see how savings is directly affected by this effect... By the way, does this effect only occur in a fiscal policy?

Thanks in advance.

Can you please explain using an example?

The crowding-out effect in a closed economy refers to the impact of increased government spending on private investment. When the government increases its spending, it typically needs to finance this spending by borrowing money. This increases the demand for loanable funds, which are the funds available for investment. As a result, interest rates rise.

Higher interest rates make borrowing more expensive for the private sector, which reduces their incentive to invest in new projects or expand their businesses. This reduction in private investment offsets the initial increase in government spending and can result in a decrease in overall investment in the economy.

To determine the impact on savings, we have to consider that in a closed economy, total savings equals total investment. So if government spending crowds out private investment, it can also indirectly affect savings. As private investment decreases due to higher interest rates, overall savings in the economy may also decrease.

The crowding-out effect can occur due to changes in fiscal policy, such as increased government spending or tax cuts. However, it is important to note that the crowding-out effect can also be influenced by other factors, such as monetary policy or changes in consumer and investor confidence.

In simple terms, the crowding-out effect in a closed economy means that increased government spending can lead to higher interest rates, which can reduce private investment and potentially impact overall savings in the economy. It is not solely limited to fiscal policy but can also be influenced by other factors.