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    Crowding Out and Fiscal Policy

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    kanishks1311
    The document discusses crowding out which refers to a reduction in private expenditure caused by an increase in government expenditure through deficit financing. It explains the different ways government can fund spending and the macroeconomic effects. It also discusses the IS curve which depicts investment equaling savings and the LM curve showing money market equilibrium. The IS-LM model is used to describe how changes in preferences alter GDP and interest rate equilibrium.

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    Crowding Out and Fiscal Policy

    Uploaded by

    kanishks1311
    9 views9 pages
    The document discusses crowding out which refers to a reduction in private expenditure caused by an increase in government expenditure through deficit financing. It explains the different ways government can fund spending and the macroeconomic effects. It also discusses the IS curve which depicts investment equaling savings and the LM curve showing money market equilibrium. The IS-LM model is used to describe how changes in preferences alter GDP and interest rate equilibrium.

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    it is macroeconomic presentation on crowding out and fiscal policy

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    Crowding Out and Fiscal Policy

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    The document discusses crowding out which refers to a reduction in private expenditure caused by an increase in government expenditure through deficit financing. It explains the different ways government can fund spending and the macroeconomic effects. It also discusses the IS curve which depicts investment equaling savings and the LM curve showing money market equilibrium. The IS-LM model is used to describe how changes in preferences alter GDP and interest rate equilibrium.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    9 views9 pages

    Crowding Out and Fiscal Policy

    Uploaded by

    kanishks1311
    The document discusses crowding out which refers to a reduction in private expenditure caused by an increase in government expenditure through deficit financing. It explains the different ways government can fund spending and the macroeconomic effects. It also discusses the IS curve which depicts investment equaling savings and the LM curve showing money market equilibrium. The IS-LM model is used to describe how changes in preferences alter GDP and interest rate equilibrium.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    Crowding Out and Fiscal Policy

    HS202
    What is Crowding out
     The term crowding out refers to the
    reduction in private expenditure (or
    invest) caused by an increase in
    government expenditure through deficit
    budget via a tax cut or increased money
    supply or bond issue.

     There are three different ways that a


    national government can fund its
    spending, and the way it chooses affects
    the macroeconomic effects of that
    spending.
    Cont.
     Pretty much everyone agrees that if a
    government funds additional spending
    with taxes, the macroeconomic effects are
    small.
     The tax increase cancels out any multiplier
    effect of the spending, so its overall effect
    is negligible.
     Also, everyone pretty much agrees that if a
    government funds additional spending by
    printing money, the effect on total
    spending will be large.
     No one's spending is cancelled out in this
    case, and both monetary and fiscal policy
    are working together.
    What is IS Curve?
     The IS curve depicts the set of all levels of interest
    rates and output (GDP) at which total investment
    (I) equals total saving (S).
     At lower interest rates, investment is higher, which translates
    into more total output (GDP), so the IS curve slopes
    downward and to the right.
    IS curve
     (I) for investment (S) for savings When the central bank allows the banking
    system to create more money, banks increase their lending.
     This additional supply of funds reduces interest rates.
     Lower interest rates increase investment, which has a multiplier effect on
    total spending. A contraction of money will have opposite results.
    What is LM Curve ?
     The LM curve shows the combinations of interest
    rates and levels of real income for which the money
    market is in equilibrium.
     It shows where money demand equals money supply.
    LM Curve
     (L for liquidity preference (M) for money supply). If, for example, the government
    reduces taxes, thereby raising its deficit, it must borrow more.
     This added borrowing increases the demand for loanable funds and the price of these
    funds, which is the interest rate, should rise. The higher interest rate makes holding idle
    funds more expensive, and should result in an increased velocity of money.
    IS –LM Equilibrium
    IS-LM stands for
    “investment-saving” (IS)
    and “liquidity preference-
    money supply” (LM). IS-LM
    can be used to describe
    how changes in market
    preferences alter the
    equilibrium levels of
    gross domestic product
    (GDP) and market
    interest rates.
    Effective Fiscal policy
     For fiscal policy to be effective as a tool of
    macroeconomic policy, it must not crowded
    out other spending.

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