Explain the difference between zero crowding out, incomplete crowding out, and complete crowding out effect.
Explanation of Solution
Zero crowding out: In zero crowding out effect, the government increases spending, but the private sector spending remains constant.
Incomplete crowding out: In incomplete crowding out, the government increases spending, then there is less than the proportionate decrease in price sector spending.
Complete crowding out: In complete crowding out effect, if the government increases spending, then there is an equal decrease in private sector spending.
Figure -1 shows the recessionary gap as follows:
In Figure -1, the recessionary gap occurs at point 1. Here, a fall in private expenditure offsets the initial increase in aggregate demand because of increase in government spending. Thus, the aggregate demand remains constant and there is no change in real
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Chapter 11 Solutions
MindTapV2.0 Macroeconomics, 1 term (6 months) Printed Access Card, 12th (MindTap Course List)
- Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning