Question

Explain the ‘crowding-out’ hypothesis. Explain the ‘crowding-in’ hypothesis. Discuss the problems with deflation.

Answer 1

Ans:Meaning : when there is an increase in interest rates ,private investment decreases to large extent which indirectly affects the total investment .When the interest rate increases the cost for the fund to be invested also increases which discourages investor to invest.

Deflation means decrease in price of goods and services. When the price of goods fall , consumers delay their purchases thinking that the price may fall further . Drop in demand reduces overall economic activity. Deflation also affect Wages and prices. When the price falls and the wags remains same ,the cost of labour and unemployment rate increases.The rise in Unemployement decreases the spending which leads the price to fall further.