Fiscal policy-defined as decrease in private expenditure

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Reference no: EM131004666

What is Fiscal policy?

How fiscal policy can "crowd-out" the private sector.

Crowding out effect is defined as "the decrease in private expenditure (C+I) as a consequence of increase in government spending (G) or the financial needs of a budget deficit". So, crowding out cannot have a "positive" effect on the economy if government, by increasing its expenditure government can causes the private spending (C+I) to drop equal to the amount of government spending (G) rendering the net effect zero. However, if there is enough money in the economy government borrowing and expenditure may have no crowding out at all and can be a boost in aggregate demand when the economy needs it. Which is what many economists claim was the situation in the recent "great recession" of 2007/2008.

Do you agree or disagree with the "crowding-out" concept? Why?

Reference no: EM131004666

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