AP Economics Crowding Out.

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Presentation transcript:

AP Economics Crowding Out

Effect of Expansionary Fiscal Policy on Loanable Funds & Investment SLF r% r% r1 r DLF 1 ID DLF IG q q1 QLF I1 I G↑ and/or T↓ .: Government deficit spends .: DLF  .: r%↑ .: IG↓ (Crowding-Out Effect)

G↑+ IG↓+ C ↑ ↓+Xn = GDP ↑ (Crowding-Out Effect) An Expansionary Fiscal Policy as previously diagrammed will lead to higher interest rates. At higher interest rates, businesses will take out fewer loans and there will be a decrease in INVESTMENT (I) At the same time there will be a decrease in CONSUMER SPENDING (C) as they will take out fewer loans as well. This CROWDING OUT EFFECT will reduce the gain made by the expansionary fiscal policy. G↑+ IG↓+ C ↑ ↓+Xn = GDP ↑ (Crowding-Out Effect)