Crowding Out? (1 Viewer)

[skypryn]

Can someone please explain to mw in simple terms the crowding out effect? thanks

 

[kochou]

mm doesn't your textbook say??
from memory, it's when the govt borrows from domestic savings when they run budget deficits or something... and then when the private sector wants to borrow for investment, they're forced to borrow from overseas cos govt took all the domestic savings

 

[-=«MÄLÅÇhïtÊ»=-]

yep...i fink dats wat they said in hsc...only i'd phrase "borrowing for invesment" as financing the budget deficit. which is essentially same thing.

From a broader point of view (taught at uni), its wen theres an increase in aggregate demand in goods market (eg. government deficit, meaning government expenditure has increased more than revenues). This causes a spillover into the money market causing transaction money demand to increase. Interest rates would increase and this would cause a feedback into the goods market with a decrease in investment.

the lvl of crowding out can vary depending on the interest sensitivity of money.


SIMPLE TERMS:
total income increases (could be due to increase in consumption or government spending etc), but crowding out counter acts this with a smaller decrease in income. so overall, u still have an increase in total income, but not as big as without crowding out.

 

[George W. Bush]

To be simple

If the government needs to borrow money, there will be an increased demand for cash, so the interest rate will go up.

 

[masteraal]

dont forget the reverse of this is the "reverse crowding out effect" NOT the crowding in effect

 

[boredofschool]

Originally posted by George W. Bush
To be simple

If the government needs to borrow money, there will be an increased demand for cash, so the interest rate will go up.

therefore the cost of borrowing money goes up, and its more expensive for business to get loans which in effect creates 'crowding out'.......

 

[kochou]

Originally posted by masteraal
dont forget the reverse of this is the "reverse crowding out effect" NOT the crowding in effect

such thing exists??

 

[Zarathustra]

Originally posted by masteraal
dont forget the reverse of this is the "reverse crowding out effect" NOT the crowding in effect

So if the Government injects a stack of money into the economy there would be crowding in - or solitude - or do you mean just lack of the croeding out effect, in which case your post was redundant - much like mine