Chapter 13, Problem 4P

To determine

In the given situations whether direct expenditure offset to fiscal policy occurs

Concept introduction:

Direct Expenditure Offsets- The concept is alternatively known as the “Direct Crowding Out”. The direct expenditure offsets implies fiscal policy initiatives where the Government increases the public expenditure which culminates into lower investment/expenditure by the private sector. In other words, increased government spending in the market from a macroeconomic perspective, crowds out (pushes out) the private investment from the market. The diminishing private investment offsets the intended value of the government expenditure, partially or completely. If the crowded out private investment is proportional to the government expenditure the latter has no yield. On the other extreme, if the public expenditure does not affect the private spending at all, the government expenditure yields the intent.