What is “crowding-in” effect? Explain the factors which determine the strength of the crowding in effect.
What will be an ideal response?
Crowding-in occurs when government spending, by raising real GDP, induces increases in private investment spending. As the economy expands, businesses find it more profitable to add to their capacity in order to meet the greater consumer demands. Because of this induced investment, any increase in G may increase investment, rather than decrease it as the crowding-out hypothesis predicts.The strength of the crowding-in effect depends on how much additional real GDP is stimulated by government spending and on how sensitive investment spending is to the improved business opportunities that accompany rapid growth.
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Which of the following is an advantage of starting a new business as a sole proprietorship?
A) double taxation B) ease in setting up C) limited liability D) greater ability to raise funds
Which of the following policies would be most likely to reduce the rate of inflation?
A. sale of government bonds by the Federal Reserve B. a reduction in the discount rate C. an increase in the size of the federal budget deficit D. a reduction in the required reserves imposed on the banking system