how does crowding out affect aggregate demand 
according to the theory s effect it should reduce aggregate demand because it discourages spending and the demand for borrowing due to higher interest rates and reduced income the bottom linethe crowding out effect is a theory that suggests that increased government spending ultimately decreases private sector spending this is due to the higher cost of loans and reduced income that can result when the government increases taxes or borrows by selling treasuries to obtain more revenue for its own spending 