If an economy is in a recession, the government might either increase spending or decrease taxes to increase aggregate demand. This will necessarily involve the government running some sort of deficit, which will have to be paid off at some time in the future.

A. Explain what is meant by crowding out AND what it has to do with the government deficits and fiscal policy. Explain

B. Will expansionary fiscal policy be more effective when the supply curve in the loanable funds market is relatively steep or when it is relatively flat? Create 2 graphs (label all) AND explain.

C. Will expansionary fiscal policy be more effective when investment demand curve (as a function of interest rates) is steep or when it is flat? Create a graph (label all) AND explain.

D. If taxes are cut , but people see the tax cut as temporary, how will this change the effectiveness of fiscal policy? EXPLAIN

Answer rating: 100% (QA)

Crowding Out Fiscal Policy and Loanable Funds A Crowding Out and Deficits Crowding out refers to the phenomenon where government borrowing to finance fiscal stimulus can reduce private investment This ... View the full answer