Question

a. In which instance would "crowding out likely become a concern? O Prior-year budget surpluses allow the government to use saved funds to reduce taxes. In order to increase spending on infrastructure, the federal government decides to borrow funds. O A balanced budget law prevents the government from taking fiscal action during a recession. b. What becomes more difficult if "crowding out occurs due to fiscal action? O Purchasing stocks and other financial investments Making economic investments Saving income for future purchases

Answer 1

a) Prior year budget surpluses allow the government to use saved funds to reduce taxes - it is an instance where 'crowding out' would likely to become a concern.

Explanation: Crowding out implies that higher rate of interest rate would decrease the private investment in the market. In this case, if the government use saved funds from prior year budget surpluses in order to reduce taxes, it encourages the private investment and hence as a result it will boost up the capital multiplier and speed up the economic development. By lowering the tax, interest rate will also fall and the money supply will be increased. Consequently, private investment will take place.

b) Purchasing stocks and financial investments becomes more difficult if crowding out happens because of fiscal action. Fiscal action means government action which forces the interest rate to go up and as a result private investment of the economy falls.

Reason:

• In financial aspects, crowding out is a marvel that happens when expanded government inclusion in a segment of the market economy generously influences the rest of the market, either on the stockpile or demand side of the market.
• One channel of crowding out is a decrease in private venture that happens in light of an expansion in government acquiring. On the off chance that an expansion in government spending as well as an abatement in charge incomes prompts a shortage that is financed by expanded obtaining, at that point the acquiring can build loan fees, prompting a decrease in private speculation. There is some contention in current macroeconomics regarding the matter, as various schools of monetary idea contrast on how family units and budgetary markets would respond to greater government acquiring under different conditions.