Answer to Question #151812 in Macroeconomics for tubs

Question

Crowding out reduces the degree to which a change in government purchases influences the level of economic activity. Is it a form of automatic stabilizer?

Answer 1

Automatic stabilizers can be defined as the changes that occur in the economic system due to auto-correction.

Crowding out can be defined as a situation where due to an increase in government spending and raising interest rates the investment by business and the personal consumption of goods and services are reduced.

Given that crowding out reduces the degree to which a change in government purchases influences the level of economic activity. Hence, by the above definitions, it can be said that crowding out is not a form of automatic stabilizer.