Question

Discuss ways in which indirect crowding out and direct expenditure offsets can reduce the effectiveness of fiscal policy actions.

Answer 1

Indirect crowding happens when the government needs to borrow from the private sector when government spending exceeds tax revenues. In order to raise the required funds, the State must give a higher interest rate, thus pushing up market interest rates.
It reduces, or crowds out, interest-sensitive private spending.
Higher government spending will also partially offset private expenditure and thereby compensate for the increase in the overall expected expenditure that the GRB wanted to make.