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Chapter 18: 24 (page 451)

What must take place for the government to run deficits without any crowding out?

Short Answer

Expert verified

Government to run deficits without any crowding out there must be a scarcity of private capital.

Step by step solution

01

Definition

Crowding out:

Higher interest rates create a decline in private investment spending, reducing the initial gain in total investment spending, which is known as the crowding-out effect.

02

Explanation

So that the government's finances are not in conflict with private investors, there must be a scarcity of private investment. When a government's expenditures on goods, services, or transfer payments exceed its tax receipts, a budget imbalance results. Governments borrow money to make up for budget gaps, and each time they do so, they add to the national debt.

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Most popular questions from this chapter

Under what condition would crowding out not inhibit long-run economic growth? Under what condition would crowding out impede long-run economic growth?

What are some of the ways fiscal policy might encourage economic growth?

How would you expect larger budget deficits to affect private sector investment in physical capital? Why?

Assume that the newly independent government of Tanzania employed you in 1964. Now free from British rule, the Tanzanian parliament has decided that it will spend 10 million shillings on schools, roads, and healthcare for the year. You estimate that the net taxes for the year are eight million shillings. The government will finance the difference by selling 10-year government bonds at 12% interest per year. Parliament must add the interest on outstanding bonds to government expenditure each year. Assume that Parliament places additional taxes to finance this increase in government expenditure so the gap between government spending is always two million. If the school, road, and healthcare budget are unchanged, compute the value of the accumulated debt in 10 years.

Describe how a plan for reducing the government deficit might affect a college student, a young professional, and a middle-income family.
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