Answer to Question #291216 in Macroeconomics for Mugs

Question

Suppose the government raises govt. expenditure by 20% in order to increase aggregate demand. Show how this policy results in the crowding out effect.

Answer 1

The crowding out effect suggests rising public sector spending drives down private sector spending.

Government spending financed by means other than money creation may reduce private spending. This is referred to as the crowding–out of private expenditure by fiscal actions.