Final answer:
The crowding-out effect increases if planned investment is more sensitive to interest rate changes, meaning businesses are far more likely to reduce investment activity as borrowing costs rise.
Step-by-step explanation:
The crowding-out effect concerns how government borrowing can lead to higher interest rates, which may in turn reduce private investment because the cost of borrowing becomes more expensive. When planned investment is more sensitive to changes in interest rates, an increase in those rates (possibly due to increased government borrowing) is far more likely to lead to a reduction in investment activity. This higher sensitivity means that businesses are quick to cut back on investment when borrowing costs rise.
Several factors influence the profitability of investment, such as tax incentives or energy prices. However, if the government removes special investment incentives or raises business taxes, investment attractiveness decreases. Moreover, as investment is generally the most variable component of aggregate demand, changes in profitability expectations or fiscal policies can result in substantial shifts in investment trends.