Answer to Question #274716 in Macroeconomics for ishioma

Question

Discuss the circumstance where fiscal expansion leads to full crowding out

Answer 1

Fiscal Expansion is completed by government to restore economy when economy is in downturn. FE is the rise in government spending over its income. Therefore, the iS curve moves towards the right.

Crowding out is a circumstance when Fiscal Expqnsion weakens the impact of an increment in pay as it prompts a lower financing cost. The increment in government spendings prompts an increment in the annual percentage rate that diminishes financing possibilities. This negatively affects pay.

Crowding out also occurs when there is no increment in pay. Therefore, the decline in private capital is equivalent to the increment in government spendings. The annual percentage rate increases by a sum hence weakening the whole outcome of an increment in pay that happens because of higher government spendings.