What effect does high government spending have on interest rates?

High government spending can lead to an increase in interest rates due to the concept of crowding out. When the government increases its spending, it often does so by borrowing money through the issuance of bonds. This increased demand for funds in the financial markets raises the overall demand for loanable funds, which can lead to higher interest rates.

As the government competes with the private sector for available capital, it can drive up the cost of borrowing, which is reflected in increased interest rates. Higher interest rates can then make it more expensive for businesses and consumers to borrow, potentially dampening economic growth.

This relationship underscores the importance of understanding how fiscal policy (like government spending) interacts with the overall economy, especially in terms of the financial markets and the cost of borrowing.