What effect does government borrowing have on investment according to the concept of crowding out?

Government borrowing can lead to a phenomenon known as crowding out in the context of macroeconomic theory. When the government borrows funds, it competes with the private sector for available savings in the economy. This increased demand for funds tends to raise interest rates.

As interest rates rise due to the government's borrowing, the cost of borrowing for private investors increases as well. Higher interest rates make it more expensive for businesses to finance new investments. Consequently, some private investments may be delayed or canceled altogether because they are not deemed economically viable at the elevated interest rates.

Thus, the overall effect of government borrowing on private investment is a decline, as fewer projects are pursued due to the higher cost of financing. This is why the correct answer is that government borrowing decreases investment. The concept of crowding out illustrates how government fiscal activities can inadvertently lead to a reduction in the level of private investment in the economy.