Whether the given situations are an example of indirect crowding out resulting from expansionary fiscal policy action
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
Indirect Crowding Out- If the government expenditure indirectly pushes out the private investment from the economy it is the indirect crowding out. As the government increases the expenditure without increasing taxes to fund the spending, it creates a budget deficit. The government resorts to borrowing from the private sector to plug the deficit. To borrow from the business sector the government issues bonds. These bonds are made lucrative by yielding a higher interest rate. This pushes up the rate of interest in the economy. Increased interest rate discourages investment. Thus, the crowding out of private investment is an indirect outcome of the expansionary fiscal policy.
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