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 the following economy.

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 C, I, and X constant for a moment, illustrate this shock, labeling the change €œFall in growth of G.€
b. Now consider a possible side effect of the fall in the growth of G: the reversal of crowding out or crowding in. If there is 100% €œcrowding in,€ what happens to the AD shift you described in part a?
c. If there were 100% crowding out/in and no multiplier effect, what can we say about the effect of a change in the growth of G 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?

Inflation rate SRAS AD Solow Real GDP growth rate growth rate

Step by Step Solution

★★★★★

3.52 Rating (162 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

a b With 100 crowding out the decrease in G is matched by an increa... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

651-B-E-M-E (3275).docx

120 KBs Word File

Students Have Also Explored These Related Economics Questions!

The three accounts shown below appear in the general ledger of Chaudry Corp. during 2014. Instructions From the postings in the accounts, indicate how the information is reported on a statement of...

'Before the crisis, production monitoring was done to please the client, not for problem-solving. Data readouts were brought to production meetings and we would all look at then, but none of us were...

To get the most from this book and your study of customer service, apply ideas from each chapter to an organization of your choice. If you are currently employed or have a clear idea of the...

1.4. 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...

1) A person responds to an increase in income by consuming $x more. Most likely, the person's income has increased by than $x, and their savings have A) more, increased. B) more, decreased. C) less,...

Acompany's are its debts to suppliers, lenders, bondholders, the tax authorities, etc 2 receivables 3 Overdrafts 4 1 liabides The...of postgraduate education can be traced to the workings of European...

1.Suppose that the trade off between unemployment and inflations is determined by the Philips curve: 1 =u" -a(x-*') Where u denotes the unemployment rate a" un the natural rate, # the rate of...

Explain in details Problem 10.5. Suppose that the money demand function is: = Y -100. r, where r is the nominal interest rate=real interest rate in percent. Let Y=1000, and M=1000, and P=2. A. Graph...

Tomasini Corporation has provided the following data from its activity-based cost accounting system: Supervisor Salaries ps 780.000 factory supplies ps 380.000 Distribution of resource consumption...

Transformers are often rated in terms of kilovolt-amps. A pole on a residential street has a transformer rated at 35 kVA to serve four homes on the street. (a) If each home has a fuse that limits the...

If the following adjusting entry is omitted, what effect will it have on the financial statements? Unearned Rent 1 , 9 0 0 Rent Revenue 1 , 9 0 0 a . Revenues will be understated by $ 1 , 9 0 0 . b ....

4. RFC Corp. has announced a $1 dividend. If RFCs price last price cum-dividend is $50, what should its first ex-dividend price be (assuming perfect capital markets)?

Suppose the government borrows $20 billion more next year than this year. a. Use a supply-and-demand diagram to analyze this policy. Does the interest rate rise or fall? b. What happens to...

In the summer of 2010, Congress passed a farreaching financial reform to prevent another financial crisis like the one experienced in 20082009. Consider the following possibilities: a. Suppose that,...

This chapter explains that investment can be increased both by reducing taxes on private saving and by reducing the government budget deficit. a. Why is it difficult to implement both of these...

The president of the company you work for has asked you to evaluate the proposed acquisition of a new chromatograph for the firms R&D department. The equipment's basic price is $170,000, and it would...

Consider the following two mutually exclusive projects: Calculate the IRR for each project. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g.,...

2. 10 pt A survey shows that the number of customers arriving at the Subway restaurant on University Drive between 12:00 PM and 1:00 PM on any given day can be modeled by a Poisson random variable N...