Describe the three cases of the crowding-out effect

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Crowding-out effect means that the increase in government spending increases the interest rate, which reduces the private investment. There are three cases of the crowding-out effect. A zero crowding-out effect occurs when the government spending increases, but the investment does not decrease. In terms of absolute values, a partial crowding-out effect occurs when the increase in government spending is greater than the decrease in investment. In terms of absolute values, a complete crowding-out effect occurs when the increase in government spending equals the decrease in investment. Then if the government spending increases by $10 billion, the investment later on decreases by $10 billion.

Reference no: EM13187074

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