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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

The U.S. government has shut down a number of times in recent history. Explain how a government shutdown will affect the variables in the national investment and savings identity. Could the shutdown affect the government budget deficit?

Sketch a diagram of how a budget deficit causes a trade deficit. (Hint: Begin with what will happen to the exchange rate when foreigners demand more U.S. government debt.)

What are some fiscal policies for improving the technologies that the economy will have to draw upon in the future?

What is the theory of Ricardian equivalence?

Under what conditions will a larger budget deficit cause a trade deficit?
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