Answer to Question #219751 in Macroeconomics for Debbie

Question

use the expression i=i-ci and the expression for equilibrium interest rate in the is-lm model to derive an expression that measures the crowding out component

Answer 1

A contractionary fiscal policy, a decrease in government purchases or transfer payments, or tax increase has the opposite effect of crowding out based on the expression i=i-ci. Because of that the surplus is minimized, as well as government borrowing, which changes supply curve for bonds towards the left.

$As; Y = C(Y-T) + I(r) + G$