I am teaching myself macroeconomics and I am stuck on this reading Mankiw:
Because the economy’s output is fixed by the factors of production and the level of government purchases is fixed by the government, the increase in consumption must be met by a decrease in investment. For investment to fall, the interest rate must rise. Hence, a reduction in taxes, like an increase in government purchases, crowds out investment and raises the interest rate
Before that, we have the fined the following identity:
Y - C - G = I
Output - Consumption - Gov. spending = Investment.
Looking at the identity, it’s easy to see why the bolded part is right, but I can’t intuitively understand why an increase in consumption would decrease investment.