Revise later
SpaceTo flip
If confident
All Flashcards
How does crowding out affect infrastructure projects?
Higher interest rates reduce private investment in infrastructure, potentially leading to lower quality and quantity of infrastructure.
How does increased government borrowing affect interest rates?
Increased borrowing increases demand for loanable funds, driving up interest rates.
How does crowding out impact economic growth?
Reduced private investment due to crowding out can decrease long-term economic growth potential.
How does expansionary fiscal policy contribute to crowding out?
By increasing government borrowing, which raises interest rates and reduces private investment.
Explain how higher interest rates affect business investment decisions.
Higher interest rates make borrowing more expensive, discouraging businesses from investing in new projects.
How does crowding out affect the effectiveness of a stimulus package?
Crowding out reduces the effectiveness of a stimulus by offsetting some of the increase in government spending with a decrease in private investment.
How does crowding out relate to the loanable funds market?
Government borrowing increases demand in the loanable funds market, leading to higher interest rates and crowding out.
How does crowding out affect long-term economic potential?
By reducing private investment, crowding out can limit innovation and capital accumulation, hindering long-term economic potential.
How does the size of the economy affect the extent of crowding out?
In a small, open economy, crowding out can be more pronounced as government borrowing can significantly impact domestic interest rates.
How does the state of the economy impact the severity of crowding out?
During a severe recession, crowding out might be less of a concern as private investment is already low, and government spending can have a more significant impact.
How does crowding out affect the effectiveness of expansionary fiscal policy?
It reduces the effectiveness by partially offsetting the increase in government spending with a decrease in private investment.
What are potential long-term consequences of persistent crowding out?
Reduced economic growth, decreased private investment, and lower quality infrastructure.
How might policymakers mitigate the negative effects of crowding out?
By implementing policies that encourage private investment, such as tax incentives or deregulation.
What is the impact of expansionary fiscal policy on the demand for loanable funds?
It increases the demand for loanable funds.
How can monetary policy influence the crowding-out effect?
Accommodative monetary policy (lowering interest rates) can partially offset the increase in interest rates caused by government borrowing, reducing crowding out.
What role do taxes play in the crowding-out effect?
If government spending is financed by taxes instead of borrowing, the crowding-out effect can be reduced or eliminated.
How does government investment in education impact the crowding-out effect?
Government investment in education can stimulate long-term economic growth, potentially offsetting the negative effects of crowding out by increasing private sector productivity and investment.
How does government regulation impact the crowding-out effect?
Excessive government regulation can discourage private investment, exacerbating the crowding-out effect by making it more difficult for businesses to operate and expand.
What is the impact of government debt on future crowding out?
High levels of government debt can lead to higher interest rates, increasing the likelihood of crowding out in the future.
How does the timing of fiscal policy affect crowding out?
If fiscal policy is implemented when the economy is already near full employment, crowding out is more likely to occur as resources are already scarce.
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.