Final answer:
Crowding out might not inhibit long-run economic growth if private investment increases with government borrowing or if government spending is on high-productivity projects. However, if government borrowing raises interest rates, making private investment costlier and less efficient, it could have a negative impact on long-run growth.
Step-by-step explanation:
Crowding out may not inhibit long-run economic growth under certain conditions. For example, crowding out might be avoided if private investment increases alongside government borrowing. This would maintain the overall level of investment in the economy. Alternatively, if the government spending is on projects that enhance productivity like infrastructure, education, or technology, the positive effects on long-term growth could offset the negative crowding out effects.
However, crowding out could impede long-run economic growth if government borrowing leads to higher interest rates, which in turn makes it costlier for private firms to borrow for investment. This scenario assumes that private investment is more efficient in increasing economic productivity than the public investment funded by the government borrowing. If such investment by the private sector is reduced due to the increased cost of borrowing, it could result in a negative impact on economic growth.