5.5: Crowding Out

Question 1

Assume the gov. increases deficit spending.
What will happen to the demand of loanable funds , the real interest rate, and private domestic investments?

Answer 1

Demand increase, real interest rates increase, and private investment decreases.

Question 2

Why did the total number of loans increase when the gov. deficit spending?

Answer 2

This is due to it being public borrowing, private investment decreased to Qpi

Question 3

In the long run, an increase in real interest rates will mean what?

Answer 3

less economic growth b/c investment in capital stock decreases

Question 4

Crowding Out

Answer 4

the adverse effect of gov. borrowing on interest-sensitive private sector spending

Question 5

Crowding out refers to the decrease in…
A. national output caused by higher taxes
B. domestic production caused by increased imports
C. private investment due to increased borrowing by gov.
D. employment caused by higher inflation
E. exports caused by an appreciating currency of a country

Answer 5

C

Question 6

An increase in the gov. budget deficit is most likely to result in an increase in which of the following

A. The marginal propensity to consume
B. Exports
C. The real interest rates
D. the money supply
E. the simple multiplier

Answer 6

C