What is "crowding out"? Why is it important in discussions of fiscal policy? Use an appropriate diagram to illustrate your answer
Crowding out occurs when deficit spending by the government forces up interest rates and causes investment spending to contract. Some private parties who might have spent money choose instead to lend it to the government by buying bonds. If crowding out occurs, the expansionary effect of a budget deficit is substantially reduced. The crowding-out effect is based on the assumption that the total volume of private saving is fixed. If the government borrows more, private businesses must necessarily borrow less. The appropriate diagram should resemble Figure 16-10, emphasizing the interest rate effect of an expansionary fiscal policy.
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Suppose the economy is in an equilibrium in which real GDP is less than potential GDP. To increase real GDP, the government can use a fiscal stimulus of
A) increasing taxes only. B) decreasing government expenditure only. C) decreasing taxes and/or increasing government expenditure. D) decreasing government expenditure and simultaneously increasing taxes. E) increasing the quantity of money.
Explain why Argentina, one of the world's richest countries at the start of the twentieth century, has become progressively poorer relative to the industrial countries
[An alternative question: What explains Argentina's regress from riches to rags?]