What is crowing-out effect of deficit spending?

The crowding out effect is an idea/theory of macroeconomics. Generally, it states that an increase in govt. spending that produces a deficit (an expansionary fiscal policy), will result in recessionary effects. When governments run a deficit, they have to borrow from the loanable funds market, in order to get the money to pay for things. By increasing the demand for loanable funds, they in turn increase the real interest rates for these loans. Because of higher interest rates, businesses will not likely invest as much, thus they are being "crowded out." So although the G component of aggregate spending (C + Ig + G + Xn) increased, the Ig part (business investment) will decrease. Economists debate over how big of an impact the crowding effect has, but all typically agree it happens to some degree.