All Flashcards
What is the difference between crowding out and fiscal policy?
Fiscal policy is the use of government spending and taxation, while crowding out is a potential side effect of expansionary fiscal policy.
How does crowding out differ from a decrease in government spending?
Crowding out occurs when expansionary fiscal policy is partially offset by reduced private investment, while a decrease in government spending is a contractionary fiscal policy.
Differentiate between crowding out and the multiplier effect.
The multiplier effect amplifies the impact of government spending, while crowding out diminishes it by reducing private investment.
What is the difference between crowding out and the Ricardian equivalence?
Crowding out focuses on the impact of government borrowing on interest rates and private investment, while Ricardian equivalence suggests that government borrowing has no effect on aggregate demand because consumers save more in anticipation of future taxes.
Compare the effects of crowding out in the short run versus the long run.
In the short run, crowding out reduces the effectiveness of fiscal stimulus. In the long run, it can lead to lower economic growth and reduced infrastructure investment.
What is the difference between crowding out and the accelerator effect?
Crowding out is the reduction in private investment due to increased government borrowing, while the accelerator effect is the positive relationship between changes in output and investment.
Compare the effects of crowding out in a closed economy versus an open economy.
In a closed economy, crowding out primarily affects domestic investment. In an open economy, it can also affect net exports through changes in exchange rates.
What is the difference between crowding out and the paradox of thrift?
Crowding out is the reduction in private investment due to increased government borrowing, while the paradox of thrift is the idea that increased saving can lead to lower aggregate demand and economic activity.
How does crowding out differ from the effects of monetary policy?
Crowding out is a consequence of fiscal policy, while monetary policy involves actions taken by the central bank to influence the money supply and interest rates.
Compare crowding out with the effects of supply-side economics.
Crowding out can reduce the effectiveness of demand-side fiscal policy, while supply-side economics focuses on policies that increase aggregate supply, such as tax cuts and deregulation.
How does an increase in government borrowing shift the demand curve in the loanable funds market?
It shifts the demand curve to the right, indicating a higher demand for loanable funds at any given interest rate.
What does a rightward shift of the AD curve represent in the context of expansionary fiscal policy?
It represents an increase in aggregate demand due to the government's increased spending or tax cuts.
How does crowding out affect the final position of the AD curve after expansionary fiscal policy?
The AD curve shifts right initially but then shifts back left slightly due to reduced private investment, resulting in a smaller overall increase in AD.
On a loanable funds market graph, what indicates the real interest rate?
The point where the supply and demand curves for loanable funds intersect.
How does the AD/AS graph illustrate the impact of crowding out?
It shows the AD curve shifting right due to fiscal policy, then partially shifting back left due to reduced investment, resulting in a smaller net increase in output.
In the loanable funds market, what does the vertical axis represent?
The real interest rate.
In the loanable funds market, what does the horizontal axis represent?
Quantity of loanable funds.
What happens to the equilibrium interest rate when the government increases borrowing?
The equilibrium interest rate increases.
What does the AD/AS model show about the effects of crowding out on price level?
The price level increases, but not as much as it would have without crowding out.
What does the AD/AS model show about the effects of crowding out on real GDP?
Real GDP increases, but not as much as it would have without crowding out.
What is crowding out?
Government borrowing increases interest rates, reducing private investment, thus lessening the impact of fiscal stimulus.
Define expansionary fiscal policy.
Government increases spending or decreases taxes to stimulate economic activity.
What is the loanable funds market?
The market where borrowers and lenders interact to determine the equilibrium interest rate and quantity of loanable funds.
Define private investment.
Spending by businesses on capital goods, such as machinery, equipment, and buildings.
What is a recessionary gap?
When the equilibrium level of output is below the full employment level of output.
Define aggregate demand (AD).
The total demand for goods and services in an economy at a given price level.
Define interest rate.
The cost of borrowing money, expressed as a percentage.
What is fiscal policy?
Government's use of spending and taxation to influence the economy.
Define economic growth.
An increase in the production of goods and services in an economy over time.
What is capital accumulation?
The increase in the stock of capital goods in an economy.