Question: We usually think about crowding out as a decrease in private consumption or investment in response to an increase in government purchases. But the idea

We usually think about crowding out as a decrease in private consumption or investment in response to an increase in government purchases. But the idea works in reverse as well, an idea we might call "crowding in." Consider an economy that starts in long-run equilibrium. (That is, in the Aggregate Supply-Aggregate Demand model, the economy is at the point where Aggregate Demand, LongRun Aggregate Supply, and ShortRun Aggregate Supply intersect).

A) Starting from this initial position, the economy is hit by one shock: a large decrease in government purchases, perhaps caused by the end of a war. Holding the growth of Consumption, Investment, and Net exports constant for a moment, what happens to aggregate demand?

B) Now consider a possible side effect of the fall in the growth of Government purchases: the reversal of crowding out or crowding in. If there is 100% corwding in, what happens to the Aggregate Demand shift you described in part a?

C) If there were 100% crowding out/in and no multiplier effect, what can we say about the total effect of a change in the growth of Government purchases on aggregate demand?

D) Consider all of the laid-off government workers in this question: If there were 100% crowding out/in and no multiplier effect, where do these laid-off workers end up?

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