Q. 13.2 Discuss ways in which indirect c... [FREE SOLUTION]

Chapter 13: Q. 13.2 (page 281)

Discuss ways in which indirect crowding out and direct expenditure offsets can reduce the effectiveness of fiscal policy actions.

Short Answer

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As shown in the figure, the I.S curve shifts from I.S to $I . S 2$ to the right. The economy should move to equilibrium $E 1$ at output $Q 2$ , but in the real economy it moves to $E 2$ at output $Q 3$ , so the decrease in output from $Q 2$ to $Q 3$ is generally due to crowding out. That is a concern for policy makers.

Step by step solution

Step 1- Introduction

The indirect crowding and diect expenditure offsets

Indirect crowding out -The crowding out effect is an economic theory that argues that increasing public sector spending reduces or eliminates private sector spending.

The crowding effect is a situation where rising interest rates reduce private investment spending, which weakens the initial increase in total investment spending.

Direct Expenditure- Direct expenses are payments to the department's account if no purchase order is required and the buyer's card is not accepted by the supplier.

Direct expenses are expenses related to the purchase of a product. Many companies are trading for resale and need to buy in bulk to work. Direct spending refers to everything related to what you buy.

Step 2- Explanation

$E$ is the equilibrium of the I.S.-L.M. model. Therefore, if the government spies, fiscal expansion and a right shift in the I.S. curve will occur. However, the IS shift is not perfect. The highest government has increased by $1000$ , but I.S. The cost is less than $$ 1000$ instead of $$ 1000$ . Maybe it's $$ 100$ or $$ 200$ . In such cases, it is a problem because it causes crowding out of investment.