Govt spending effects on gross private investment?

Question

I know that whenever there is an increase in govt spending, gross private investment spending tends to decrease, but why is this?
What should policy makers do to reverse the decrease in gross private investment spending.
Finally, what would be the resulting effects of an increase in govt spending accompanied by a policy puch for an increase in gross private investment spending?

Answer 1

Essentially, in an economy there is a limited amount of money to go around (unless you want rampant inflation).

This means that when the government borrows money, there is less money for private businesses/individuals to borrow to use for capital investment.


A policy push for increasing private investment coupled with an increase in government spending would need to have a monetary expansion, which would lower interest rates and probably cause inflation.

Answer 2

In the last case, it would level out gross private investment spending, all things remaining equal.