Answer to Question #235606 in Macroeconomics for Ridhima Mittal

Question

What will be the impact of increasing government investment when the economy is growing rapidly?
Hint: talk about crowding out effect.

Answer 1

There is a higher likelihood of rising in aggregate demand hence economy grow higher in the short-term. However, according to the crowding out effect, increase in government investment, reduces private sector involvement in economic growth; which in the long-run can lead to the fall of such sectors and hence reduced economic growth.