Answer to Question #66719 in Macroeconomics for Thomas

Question

An Increase in Government Expenditure (Fiscal Policy) will be off-set by an equal decrease in private consumption, leaving aggregate demand unchanged.' Critically discuss with reference to theory and evidence

Answer 1

An Increase in Government Expenditure will be off-set by an equal decrease in private consumption, if it is financed with the increase in taxes, which will decrease consumer spending leaving aggregate demand unchanged. That's why there will be crowding-out effect.