Asked by Mashudu Daniel Rambau on Apr 28, 2024
Verified
Crowding-out
A) refers to the idea that increases in government purchases inevitably cause reductions in some form of private consumption or investment.
B) only occurs at full employment levels of National Output.
C) is translated into inflation during periods of slack employment.
D) does not include loss of leisure on the part of workers employed as a result of government spending.
Crowding-Out
A situation where increased government spending leads to a reduction in private sector spending.
Government Purchases
Expenditures made by the government for goods and services that are necessary for the public sector and to support economic activity.
National Output
The total value of goods and services produced by a country's economy over a specific period of time. It's synonymous with gross domestic product (GDP).
- Explain the phenomena of crowding-out and crowding-in effects, and their impacts on private investment and the growth of the economy.
Verified Answer
B) is incorrect because crowding-out can occur even when the economy is not at full employment, as long as it operates near potential output.
C) is also incorrect because crowding-out does not necessarily lead to inflation during periods of slack employment. Rather, it can result in reduced private investment and lower economic growth.
D) is partially correct, but incomplete, as crowding-out does indeed involve the loss of leisure by workers who are employed as a result of government spending. However, it also involves the reduction in private consumption or investment that is necessary to accommodate the increased government borrowing.
Learning Objectives
- Explain the phenomena of crowding-out and crowding-in effects, and their impacts on private investment and the growth of the economy.
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