4.5 - Crowding + Austerity

Question 1

What is crowding out?

Answer 1

Transfer of private assets into public ownership
Generally during rapid spending

Question 2

What is crowding in?

Answer 2

Increasing spending expands real GDP
Incentivises private capital investment + employment

Question 3

What is fiscal austerity?

Answer 3

Spending cuts and/or tax increases
Used to reduce deficit

Question 4

What are the macro impacts of austerity?

Answer 4

Smaller deficit may attract investors
Central Bank keep IR low
Deflation if cuts create spare capacity
Potential negative multiplier

Question 5

What can crowding out lead to?

Answer 5

Tax burden
Market interest rates rise
Fund public expenses

Question 6

How can crowding out adversely affect the private sector?

Answer 6

Squeezes profit + investment
Higher borrowing costs

Question 7

How can crowding out incur higher private borrowing costs?

Answer 7

Increased govt borrowing
Higher credit/loan demand
Market IR rise