Answer to Question #219463 in Microeconomics for fanscil

Question

Give five explanations how expanded fiscal policies may crowd out investment in sometimes (fiscal stimulus).

Answer 1

Fiscal policy refers to a government's spending and taxation decisions. If a government wishes to boost economic growth, it will boost spending on goods and services. Demand for goods and services will rise as a result of this. As demand rises, production must rise as well. Companies may need to hire additional people if output increases. Previously unemployed people may now have jobs and money to spend on goods and services. This will raise demand even more, necessitating additional production, and hopefully, the growth cycle will continue. People may have more money to spend on things at Barry's store, thus he may see an increase in business. As a result, government spending has a tendency to accelerate economic growth. If the government believes the economy is overheating (or growing too quickly), it may cut spending. Government spending cuts will reduce overall demand in the economy.

Businesses will reduce production, resulting in lower profits, which will result in fewer job openings and company investments. A reduction in government funding could affect Barry's business because people will have less money in their pockets to spend at his store, possibly due to layoffs. If Barry provides the government with goods or services, he may face a twofold penalty. Taxes are the opposite side of fiscal policy. Lowering taxes has been shown to boost economic growth. Barry will have more money in his pocket if taxes are reduced. Either he'll spend it or save it. If he spends money, demand rises, forcing businesses to produce more. This may necessitate the hiring of additional personnel. These individuals will have more money to save or spend, perhaps at Barry's shop. Barry, on the other hand, will put the money in his bank if he saves it. The money he deposited will be lent by the bank, and borrowers will spend it.

Some economists are afraid that increased government expenditure and tax cuts may result in crowding out. The government will have to borrow money if it does not have enough revenue to support spending. Government borrowing, according to some economists, tends to raise interest rates. Furthermore, rising interest rates deter individuals and firms, such as Barry, from borrowing money for spending and investing. Government expenditure, according to these experts, may crowd out private investment.