Using graphs, explain how indirect crowding out can occur when the government increases spending in an attempt to stimulate the economy
What will be an ideal response?
See the above figure. The original equilibrium is E1, where there is a contractionary gap. The government pursues expansionary fiscal policy by increasing spending. Its goal is to reach E2. However, the increased borrowing causes the interest rate to increase, so private investment spending falls. The aggregate demand curve shifts back to AD3.
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In the Keynesian cross diagram, a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to fall, and
the IS curve to shift to the ________, everything else held constant. A) up; left B) up; right C) down; left D) down; right
The production function for hamburgers can be written as q = 0.1X + 0.1Y, where X is Canadian ground beef and Y is U.S. beef, both measured in pounds. Which graph in the figure best represents the isoquants for the hamburger production when U.S
ground beef is on the vertical axis and Canadian ground beef is on the horizontal axis? A) Graph A B) Graph B C) Graph C D) Graph D