Question

4. Clearly explain what “crowding out” refers to, what would cause it to occur, and why...

4. Clearly explain what “crowding out” refers to, what would cause it to occur, and why this is viewed as a problem. Explain how the interest elasticity of investment affects the level of crowding out in the Keynesian model. Be sure to explain WHY this is the case. (10 pts.)

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Crowding out refers to the fall in private investment due to rise in rate of interest in the market. Rise in interest rate is caused by the significant uptick in government borrowings from market.

When government increases its expenditure, it resorts to market borrowing. Borrowing from market reduces availability of cash for other private investors. It increases interest rate in market. Rise in interest rate reduces private investments on account of rise in cost of production. hence, it is regarded as problem.

Interest elasticity of investment implies the degree of responsiveness of investment to change in interest rate. High interest elasticity of investment will cause higher crowding out effect and conversely, low interest elasticity shall cause low crowding out effect.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
What is crowding out? How do rising interest rates cause crowding out? Why is crowding out...
What is crowding out? How do rising interest rates cause crowding out? Why is crowding out of concern for the economy?
Explain the crowding-out-of-investment of a decrease in the tax rate. c) (4 pts) When there is...
Explain the crowding-out-of-investment of a decrease in the tax rate. c) (4 pts) When there is a binding situation for the interest rate, graph the Aggregate demand (AD) curve and explain the shape of the AD curve.
What is crowding out? How does budget deficit crowd out investment? Why is a high level...
What is crowding out? How does budget deficit crowd out investment? Why is a high level of government debt is a matter of concern?
7. Explain the term Crowding In. What does it refer to, why would it be considered...
7. Explain the term Crowding In. What does it refer to, why would it be considered beneficial, and does this mean there is no crowding out? (7 points)
-Why do oligopolists have the incentive to fix prices? What are the obstacle to succesful collusion?...
-Why do oligopolists have the incentive to fix prices? What are the obstacle to succesful collusion? - Suppose that the marginal propensity to consume in the economy is 0.75. Assuming that prices are constant, what effect would a $50 million increase in investment spending have on the equilibrium real GDP? - Use the model of aggregate demand and aggregate supply to show the differences between demand-pull inflation and cost-push inflation. - Why is crowding out an important issue in the...
Explain why a linear model would or would not be appropriate to model that situation. In...
Explain why a linear model would or would not be appropriate to model that situation. In addition to your explanation make sure you clearly let me know if a linear function would be good or not for each situation. a)An employee’s earnings at a part-time job as a function of the number of hours they work. b)The number of cases of a highly contagious disease as a function of days since it was first detected. c)The length of a fish...
Explain how the Federal Reserve’s lowering of interest rates affects the following variables in the short...
Explain how the Federal Reserve’s lowering of interest rates affects the following variables in the short run: household consumption, business investment, real GDP, and the price level. Insert or attach a well-labeled Aggregate Demand/Aggregate Supply graph that would illustrate the effect of a cut in interest rates. What is one macroeconomic problem that could cause the Federal Reserve to become aggressive in raising interest rates? Explain. Describe one issue that could cause the Fed to lower rates? Define the “federal...
MACROECONOMICS given: Crowding out with algebra. Consider an economy described by the following model. Y =...
MACROECONOMICS given: Crowding out with algebra. Consider an economy described by the following model. Y = K1/3L2/3 K = 1000; L = 1000 G = 100 T = 100 C = 250 + 0.5(Y-T) I = 600 – 100r i. Calculate the equilibrium real interest rate, national saving, public saving, private saving, consumption, output, and investment. List your numbers out like this: Y = 1000 r = 4 S = 200 Spub = 0 Spriv = 200 C = 700...
A real Keynesian model of a mixed economy with a marginal propensity to consume equal to...
A real Keynesian model of a mixed economy with a marginal propensity to consume equal to .9 produces an equilibrium level of $2400 billion that is $600 billion below a full employment level of output. A) What change in government spending would bring about full employment? Be sure to calculate the government spending multiplier. B) The resulting increase in real output have driven up real interests rates from 3% to 4% and those higher real interest rates reduced investment by...
Problem 4 Why would one want to use masking MC/DC instead of unique-cause MC/DC? Give a...
Problem 4 Why would one want to use masking MC/DC instead of unique-cause MC/DC? Give a good example of where use of masking MC/DC would be advantageous. Your example should not just be a Boolean function example, think of a real-world case.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT