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Chapter 18: 24 (page 451)

What must take place for the government to run deficits without any crowding out?

Short Answer

Expert verified

Government to run deficits without any crowding out there must be a scarcity of private capital.

Step by step solution

01

Definition

Crowding out:

Higher interest rates create a decline in private investment spending, reducing the initial gain in total investment spending, which is known as the crowding-out effect.

02

Explanation

So that the government's finances are not in conflict with private investors, there must be a scarcity of private investment. When a government's expenditures on goods, services, or transfer payments exceed its tax receipts, a budget imbalance results. Governments borrow money to make up for budget gaps, and each time they do so, they add to the national debt.

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Most popular questions from this chapter

Explain why the government might prefer to provide incentives to private firms to do investment or research and development, rather than simply doing the spending itself?

Based on the national saving and investment identity, what are the three ways the macroeconomy might react to greater government budget deficits?

During the most recent recession, some economists argued that the change in the interest rates that comes about due to deficit spending implied in the demand and supply of financial capital graph would not occur. A simple reason was that the government was stepping in to invest when private firms were not. Using a graph, explain how the use by the government in investment offsets the deficit demand.

Explain how a shift from a government budget deficit to a budget surplus might affect the exchange rate.

What are some of the ways fiscal policy might encourage economic growth?
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