Why does a larger government budget deficit increase the magnitude of the crowding-out effect?
The crowding-out effect states that the government borrows to pay for the deficit, it drives up the interest rates in the marketplace for all other borrowers. This higher interest rate then discourages consumers and business from borrowing. In other words, the government borrowing for deficit financing crowds out private spending and investment. Therefore, the greater the increase in the deficit, the larger these effects will be.
You might also like to view...
The marginal propensity to consume is 0.75, marginal propensity to invest is 0.3, and the marginal propensity to import is 0.2. What is the size of the multiplier?
A) 6.67 B) 5.67 C) 4.67 D) 1.67
The three types of farm subsidies under the Food, Conservation, and Energy Act of 2008 are:
A. Equipment coupons, land leases, and income contributions B. Marketing agreements, transition payments, and interest loans C. Direct payments, countercyclical payments, and marketing loans D. Public land sales, fertilizer discounts, and farm bank loans
Related to the Economics in Practice on p.221 [533]: According to a recent study by Simon Gilchrist, Fabio Natalucci, and Egon Zakrajsek, investment expenditures are ________ changes in interest rates.
A) highly sensitive to B) highly insensitive to C) completely independent of D) positively related to
David Dollahite's ABCD-XYZ Resource Management Model shows that __________ cannot be studied in isolation, adaptive coping is important
a. Stress and stressors b. Love c. Work d. Career seeking activity