Th4.5: ^^ Crowding Out

Question 1

In order to spend money above their tax revenues, what does the government have to do?

Answer 1

borrow from individuals and businesses

Question 2

However, the amount of money in the economy does not increase - what does this result in?

Answer 2

the government competing with the private sector for finance, causing higher interest rates, discouraging firms from investing and individuals from buying on credit

Question 3

On top of this, what does the limited number of resources in the economy mean?

Answer 3

for every resource used in government spending, there are less resources available for the private sector - crowds out private sector borrowing/spending

Question 4

What do free market economists argue about this?

Answer 4

investment would be more efficient if done by the private sector and that the government targets investment poorly and is wasteful

Question 5

When is the crowding out effect usually felt most?

Answer 5

at full employment

Question 6

How are transfer payments and crowding out linked?

Answer 6

they have no impact on output and so would not cause crowding out as resources are simply taken from one group and given to another

Question 7

When could crowding in be caused?

Answer 7

when levels of unemployment are high then extra government spending could lead to crowding in where it encourages investment through the multiplier