Question
Crowding out will emerge in the economy, if :
The correct answer is
government spending is on the rise
Understanding Crowding Out Economics
Crowding out is an economic phenomenon where increased government expenditure or borrowing leads to a reduction in private sector investment.
Mechanism of Crowding Out
- Increased government spending, particularly when financed by borrowing (deficit financing), raises the demand for loanable funds in the market.
- This surge in demand typically leads to higher interest rates.
- Higher interest rates increase the cost of borrowing for private businesses, consequently discouraging investment spending.
Analysis of Conditions
Let's analyze the given conditions:
- Condition 1: Government spending is on the rise. This scenario directly contributes to the crowding out effect by increasing demand for funds and potentially raising interest rates, thus reducing private investment.
- Condition 2: Deficit financing is in control. When deficit financing is managed or controlled, the government's borrowing activities are limited. This limits the upward pressure on interest rates, mitigating the crowding out effect.
Conclusion
Crowding out is most likely to emerge when government spending is increasing, as this directly impacts the market for loanable funds and influences interest rates, affecting private investment.
Therefore, the correct condition for crowding out to emerge is when government spending is on the rise.
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Important Questions from Macroeconomics
- A less elastic IS curve means that :
- In Keynesian framework, at full employment, which of the following is/are true ?
(a) Supply curve in the short period is inelastic.
(b) The supply is influenced by the increase in the quantity of money.
Select the answer from the code given below : - When LM curve is vertical, which one of the following is correct ? An increase in money supply will lead to :
- Which among the following were neglected by Keynes in his theory of employment ?
- Which of the propositions of the past income hypothesis of Duesenberry are correct ? Choose from the code below :
Statements :
I. The current consumption is a function of not only current income, but also the past income.
II. There is asymmetrical relationship between income and consumption during contraction and expansion.
III. Consumption income relationship is irreversible.
IV. Consumption falls less than income during depression, but the rise in consumption is much more during expansion.
Codes :
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