Explain the concept of "crowding out" in a closed economy
What will be an ideal response?
In a closed economy, GDP consists of consumer spending, investment spending and government purchases. If we consider the economy to be at full employment, then GDP is considered fixed. If government spending increases, other components of the fixed GDP must decrease. In this sense, increased government spending reduces, or "crowds out" other components of GDP—investment spending and/or consumer spending.
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What are the effects of an increase in the minimum wage? Who would be most affected?
What will be an ideal response?
In most cases, expenditure-switching policies must be accompanied by expenditure-reducing policies because
A) expenditure-switching policies are completely ineffective without expenditure-reducing policies. B) inflation ensues as home country domestic expenditures switch away from foreign goods to domestic goods unless overall expenditures are reduced. C) inflation abroad may increase the demand for domestic goods, causing inflation to rise. D) the depreciation in the exchange rate may decrease the domestic price of foreign goods, causing an increase in the current account deficit.