Explain how crowding out works

Reference no: EM133227229

The main question here is which one of these measures will reduce employment best: government tax reduction, or increased government spending? Compare the multiplier effect of a tax reduction versus the multiplier effect of an increase in government spending? Which of the two will have a bigger impact in the economy and why based on the two formulas?

Using the formulas: If $30 billion in new investment is added to the economy and MPC is 0.9, how much would the national income (GDP) increase by? Thanks. G

Also, as a result of an increase in government purchases there is a decline in private sector investment expenditures. This is known as the "crowding out" effect. Please explain how "crowding out" works and what is the impact of this on national output and employment during a recession.

Reference no: EM133227229

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