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Chapter 13: Q. 13.2 (page 281)

Discuss ways in which indirect crowding out and direct expenditure offsets can reduce the effectiveness of fiscal policy actions.

Short Answer

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As shown in the figure, the I.S curve shifts from I.S to I.S2to the right. The economy should move to equilibrium E1at output Q2, but in the real economy it moves to E2at output Q3, so the decrease in output from Q2to Q3is generally due to crowding out. That is a concern for policy makers.

Step by step solution

01

Step 1- Introduction

The indirect crowding and diect expenditure offsets

Indirect crowding out -The crowding out effect is an economic theory that argues that increasing public sector spending reduces or eliminates private sector spending.

The crowding effect is a situation where rising interest rates reduce private investment spending, which weakens the initial increase in total investment spending.

Direct Expenditure- Direct expenses are payments to the department's account if no purchase order is required and the buyer's card is not accepted by the supplier.

Direct expenses are expenses related to the purchase of a product. Many companies are trading for resale and need to buy in bulk to work. Direct spending refers to everything related to what you buy.
02

Step 2- Explanation

E is the equilibrium of the I.S.-L.M. model. Therefore, if the government spies, fiscal expansion and a right shift in the I.S. curve will occur. However, the IS shift is not perfect. The highest government has increased by 1000, but I.S. The cost is less than$1000instead of $1000. Maybe it's $100or $200. In such cases, it is a problem because it causes crowding out of investment.

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Most popular questions from this chapter

Consider the accompanying diagram, in which the current short-run equilibrium is at point A, and answer the questions that follow:

a. What type of gap exists at point A?

b. If the marginal propensity to consume equals 0.75, what change in government spending financed by borrowing from the private sector could eliminate the gap identified in part (a)? Explain.

Determine whether each of the following is an example of an automatic fiscal stabilizer.

a. A federal agency must extend loans to businesses whenever an economic downturn begins.

b. As the economy heats up, the resulting increase in equilibrium real GDP per year immediately results in higher income tax payments, which dampen consumption spending somewhat.

c. As the economy starts to recover from a severe recession and more people go back to work, government-funded unemployment compensation payments begin to decline.

d. To stem an overheated economy, the president, using special powers granted by Congress, authorizes emergency impoundment of funds that Congress had previously authorized for spending on govemment programs.

A government has found that 2 months elapse before it can identify a problem to address with policy action. It has been found that 1 month is required to determine the appropriate policy action. Finally, it has been concluded that the total time required between the initial presence of the problem and the effects of a policy action to be realized is 12 months. What are the remaining policy time lag and its duration?

Use traditional Keynesian analysis to evaluate the effects of discretionary fiscal policies.

Every 1-percentage-point increase in the marginal income tax rate induces some workers to supply less labour, which cuts real GDP by \( 0.2 trillion. At the same time, each 1-percentage point increase in the marginal income tax rate causes spendable income to drop, which induces some workers to supply labour that yields \) 0.1 trillion more in real GDP. Is the net outcome consistent with the supply-side theory? Why?
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